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Daily Newsletter, Sunday, 08/26/2001

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The Option Investor Newsletter Sunday 08-26-2001
Copyright 2001, All rights reserved. 1 of 5
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MARKET WRAP (view in courier font for table alignment)
******************************************************************
WE 8-24 WE 8-17 WE 8-10 WE 8-3
DOW 10423.17 +182.39 10240.78 -175.47 10416.25 - 96.53 + 96.11
Nasdaq 1916.80 + 49.79 1867.01 - 89.24 1956.47 -109.86 + 36.60
S&P-100 606.71 + 12.84 593.87 - 17.54 611.41 - 12.24 + 3.39
S&P-500 1184.93 + 22.96 1161.97 - 28.19 1190.16 - 24.19 + 8.42
W5000 10948.41 +188.32 10760.09 -234.36 10994.45 -248.49 + 76.94
RUT 480.81 + 5.16 475.65 + .13 475.52 - 11.63 + 2.13
TRAN 2854.39 + 29.74 2824.65 - 36.12 2860.77 - 53.25 + 4.14
VIX 22.29 - 4.45 26.74 + 3.93 22.81 + .42 - 2.34
VXN 47.70 - 4.32 52.02 + 3.50 48.52
TRIN .70 2.67 1.03
TICK 351 201
Put/Call .56 1.07 .72 .76
******************************************************************
I Want To Believe, I Really Do!
by Jim Brown
Thank you Cisco for the early Christmas present! Let's just hope
it does not turn into a Halloween scare instead. If you don't
live in a cave you know that Cisco casually mentioned on Thursday
night that their business was stabilizing and the shorts ran
screaming for cover on Friday. The Dow managed a one day rally
of +194 points and the Nasdaq soared +73 points for 4% one day
gain. Did traders wake up on Friday in a time warp and relive
a fall day from 1999? Not hardly. While stocks were gaining +10%
to +15% for the day the moves were measured in cents and not
dollars. CSCO, which inspired the monumental rally, gained a
whopping +9% or $1.49. NT gained +6.31% or 42 cents. Sigh!
The Cisco rally did power the networking sector as well as some
semiconductor stocks off near 52-week lows but investors were
not rushing back into the market. AMCC and PMCS were big gainers
as traders hoped that a healthy Cisco would mean a resumption of
orders to those companies. AMCC gained +11.49% or $1.55 and
PMCS gained almost 9% for $2.79. Competitor JNPR barely budged
off the bottom with a +1.08 gain.
The Dow was bolstered by tech components MSFT, INTC, IBM and HWP
as each rebounded on the Cisco news. More importantly the economic
reports gave all but three of the other Dow components big gains
as well. The New Home sales came in slightly higher than expected
with a +4.9% gain while prices fell to $168,300. Time on the
market fell and the Northeast region produced +18% growth over
the June levels. No consumer worry in this sector! The growth
in new home sales is now expected to hold up the GDP numbers
which will be out next week. The jump in home sales show that
the lower interest rates are having the desired impact on the
economy.
While new home sales are up the Weekly Leading Indicators showed
that mortgage applications declined last week to the lowest level
since May. Other factors weighed on the WLI as well and it fell
for the fourth week in a row indicating that chances for a broad
recovery by the end of the year are fading. The WLI tends to lead
the business cycle in downturns by ten months and recoveries by
three months. The index has been erratic over the last couple of
months and recent strength has been fading.
Durable goods did not demonstrate any new strength by falling
-0.6% in July. The index was led by a downturn in semiconductors
and computer equipment. The PC price war is in full swing with
Compaq and Dell slugging it out in the retail sector. Compaq
announced a sub $1000 laptop and Dell is hawking a $600 full
strength desktop model. This war is depressing the retail stocks
like Office Depot, Staples, CompUSA, etc. Shrinking prices mean
shrinking margins. The fierce price war indicates that computers
are not selling and manufacturers have to keep cutting to the
bare bones to entice buyers to part with their money. Once they
hit their base cost and cannot cut prices further the consumer
may not find any reason to add another PC to their household.
You can sell anything as long as you give it away but corporations
know that you can't make payroll by losing money on every sale.
Next week we will get to see if the gloom and doom from the Fed
minutes are borne out in the GDP reports. GDP for the 2Q had been
pegged at +0.7% and well below expectations. Recent developments
may have sent that number much lower and should it drop into
negative territory on Wednesday all the Cisco optimism Chambers
can muster will have no impact on the markets. Investors and
economists can fool themselves all they want until the GDP goes
negative then all bets are off. Once true negative growth is
official, all kinds of new problems will appear. The Consumer
Confidence for August will be released on Tuesday and that is
almost as critical as the GDP. If confidence begins to fall the
Fed may need to fire off another cut to quickly and artificially
shore up the consumer mindset and keep them spending.
Analysts were quick to point out that the rally on Friday had
no legs because there was still no volume. With the worst week
in August still ahead of us there was no rush to buy from traders
on the sidelines. There are more traders on the sidelines every
day. According to TrimTabs.com stock funds had a negative outflow
of -$3.5 billion for the week ended on Wednesday. This follows
-$2.6 billion and -$2.5 billion weeks. Not a good sign for
investors hoping the rally is here to stay.
Starting Monday new rules go into effect on the NYSE for
daytraders and on Sept 28th for NASD members. "Pattern" daytraders
who use margin to buy stock currently only need $2000 in their
account. When the rule change occurs they will be required to
have $25,000 in their account. A "pattern" daytrader is one
who makes four daytrades (open and closed the same day) a week.
Daytrading volume has fallen about -30% since last year and some
feel that many traders who would have qualified with accounts
over $25K last year are now struggling below that number after
being pounded by the bear market. Some say that taking those
traders out of the market could knock another 10% to 15% of
the volume out of the market and prevent them from powering
any future rally. That may be an extreme position fostered by
the highly vocal daytrading community. Actually there is a
portion of the rule that works in the favor of investors that
meet the $25K threshold. They get 4:1 margin on their accounts
instead of the current 2:1. That means they can leverage
$100,000 of stock on margin instead of the current $50,000.
86 million shares of CSCO changed hands and were it not for
Friday both major indexes would have closed negative for the
week. Even with the CSCO volume the Nasdaq only posted 1.4
billion shares, which is still good for an August Friday, but
not strong. The NYSE only managed slightly over one billion.
The internals were good but the trading pattern was a big
spike up at the open and then another "capitulation" spike
by shorts at the close. Why capitulation?
On this chart of LBRT you can clearly see the extreme burst of
volume at the open where surprised shorts raced to cover. Those
that failed to cover in the morning sat through lunch in denial
only to see another wave up start around 2:PM. Those still short
finally bit the bullet and bought the close rather than be
faced with another possible gap open on Monday morning. They
capitulated and threw in the towel after an 18% gain in a $13 stock.
The trading pattern is not normal "buying" even in a bull market.
The same time frame for IDPH shows the exact same pattern for
Friday and they are not a tech stock. Simply a broad market
relief rally fueled by bullish sentiment on reactions to the
Cisco statement. IDPH shows the same pattern for Thursday as
well when the biotech sector was getting so much air time on
stock TV. A $10 move (20%) in two days! Look for a new put
play in today's newsletter.
Where do we go from here? Most of Friday afternoon the markets
held EXACTLY at resistance of 10400 and 1900. Literally only 2-3
points away for quite a while. Only the capitulation at the close
powered them over those levels. 1935-1950 is strong resistance on
the Nasdaq and the Dow has been topped out in the 10400-10450
range for all of August. The bulls have their work cut out for
them next week and this is typically the worst week of August.
Once through this week however the post Labor Day holiday week
is normally bullish. Will traders anticipate that bullish week
and put in a bottom here or will the month end portfolio
shuffling prevent that? No one can tell. Institutional traders
will wait until the following week to decide if the market is
stable before committing funds. September brings earnings
warning season again and then October and the tax selling. We
have to remember the name of the game is capturing profits
from stock movement not making the most trades.
The VIX closed at a two month low of 22.21, a number not seen
since July 5th, the day before the Dow started a -250 point drop.
John Murphy said it very cautiously on Friday. "There is too much
bullishness in the markets for this time of year". Of analysts
surveyed, 47% are bullish and only 32% are bearish. Considering
that Sept and Oct are still in front of us this is very unusual
and not a likely base from which to rally. Remember the money
flow out of the markets in the last three weeks, -$8.6 billion.
This money is not going to just magically reappear just because
Cisco says the networking business MAY be stabilizing. The markets
were deeply oversold and shorted and begging for a relief bounce.
We got it and my two cents says "continue to be patient" and even
if we do not get a better entry point I doubt the markets will go
much higher before Labor Day. (famous last words - right?)
Definitely, enter passively, exit aggressively!
Jim Brown
Editor
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**************
Editor's Plays
**************
Bottom Fishing
So many traders want to buy the dip that we really need to
study some simple chart patterns and learn to recognize the
right entry points.
In today's market there is no right entry point and luck
plays as much a part in our success as anything. However,
I believe "luck" favors the well prepared and OptionInvestor
helps you be prepared.
In looking at my list of possibles this weekend I came up
with a few stocks that looked good and had minimum risk.
I am basing this strictly on the chart patterns and I am
making no representations about the stocks themselves.
Some of the possibles I have listed below for your review
and the reasons I would consider buying them.
Cypress Semiconductor - $23.90
Cypress is showing very strong relative strength to the rest
of the semiconductor sector. It held $20 and traded in a
very tight range while other chip stocks were crashing.
The spike to $29 on the chip rally shows that the stock
has the power to run when the sector turns positive yet
hold its own during bad times. I think the risk in this
stock is a fall back to $22 (or -$2). This is a very good
risk in today's market. I would buy the Jan-$25 calls for
$3.50 with a target of $35 on the stock as my trigger to
sell.
Second choice - If a 46% profit over 14 months or less will
work for you then buy the stock and sell the Jan-2003 $30 leaps
for $5.00. Your profit is the $5 premium + $6.10 in stock
appreciation to $30 or $11.10. $11.10 / $23.90 = 46% and you
can close the position for this profit whenever the stock hits
$30.
Are you really convinced? Remember the $35 sell target on
my $25 calls in the first example? What if you bought the
stock now and sold the Jan-2003 $35 calls for $3.50? If
Cypress hits $35 your profit would be $11.10 appreciation
plus $3.50 in premium or $14.60 or 61%. Now who ever said
covered calls were not profitable? Of course the stock
must reach $35 to make it happen.
The risk on the covered leaps is that CY falls instead of
rises. On the $30 leap you receive $5 in premium making your
loss point on Cypress $18.90. Anything under $18.90 would
be a loss, anything over that a profit.
***********
Interwoven $7.98
Merrill Lynch upgraded Interwoven the morning after the final
capitulation selling event. There was a final dip after three
months of selling that took IWOV exactly back to retest the
April 4th low and a perfect double bottom. IWOV is a software
company that sells content management software for websites.
The Oct $7.50 call is $1.70 and already $.48 in the money.
This is strictly a technical play based on the double bottom
and current strength. The risk in this play would be a fall
back under $7.00 where I could close the play.
You could buy the stock and sell the March $7.50 call for about
$2.75 and about a 30% gain if the stock closed above $7.50.
***********
Nextel $12.54
Nextel bounced off of $11.50 this week which was the April lows.
This is a simple momentum play with a stop loss just below $11.50
for minimum risk. The Feb $15 call is $1.95 which could double in
price if NXTL hits $15 well before January.
An alternate play would be to sell the Jan $20 naked put for $7.50
and everything between Friday's price of $12.50 and the put strike
of $20 would be pure profit. You would still need a stop to close
the puts if NXTL fell below $11.50.
********
Elantec $39.90
Elantec looks strong and the call premiums show it. A Feb $40 call
is $9.00. I would never pay that. I think the only way to play
this is with a naked put. I would sell the Oct $50 for $10.60
or the Feb $45 for $10.40. If the stock hits $50 either put
should go to zero and the risk as seen by the chart above appears
minimal. Still, with naked puts you can expect to be put at any
time regardless of where the stock price is currently. Still, this
is my best bet for this week!
************
Probably a good week to be out of the market but we are getting
very close to a strong buy. With companies starting to say
positive things it will not be long before the bottom fishing
begins for real.
*************
Trade smart this week, not hard!
Good Luck
Jim Brown
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****************
MARKET SENTIMENT
****************
The House That Cisco Built
Cisco got the party started, and surging new homes helped to keep
it going. Durable goods tried to crash the party, but were
turned back at the door. Stocks whooped it up into the wee hours
of the afternoon, and actually managed to hold on to their gains.
Nasdaq Composite Daily Chart
That puts the Nasdaq back above the 61.8% retracement and the
psychological 1,900 level. The big psychological test is 2,000,
but before we get there the Nasdaq has some work to do. Monday's
task is taking out prior support at 1,940. Climbing above 1974
might be too much to ask of Monday, so that will be Tuesday's
job. By Wednesday the 50-day moving average and May downtrend
will have to be dealt with.
Dow Jones Industrial Daily Chart
That Dow hasn't fallen quite as far, and has less work to do on
the way up. Today the index took care of the May downtrend, but
came up just shy of taking the 50-day moving average out of the
picture. If the Dow can put two nice days together at the
beginning of the week, perhaps it can make a run at 10,600. To
do that it will have to fight trough the 200-day moving average,
and 38.2% retracement.
That's my best-case bullish scenario for the first part of next
week. Monday has a chance for some follow through, since only
existing home sales stands in its way. Tuesday gets a little
trickier with consumer confidence numbers being released.
Wednesday is a crapshoot, with personal consumption data being
released, as well as revised second quarter GDP. Originally GDP
came in at 0.7%, well below expectations, and estimates for
revised GDP have been lowered to zero growth. Thursday and
Friday don't look good, since they are the last two days of
August. Over the past five years, the Dow has lost an average of
229.78 points the last two days of August.
So there you have it. The markets rally in first half of the
week and sell off in the later half, with Wednesday being the
crucial day as resistance and economic data meet. It sounds
simple enough, but the markets have been anything but simple
lately. Throw in the fact volume could be lower than normal,
even for summer, due to market participates taking vacation ahead
of the Labor Day weekend, and it gets even trickier.
-----------------------------------------------------------------
Market Volatility
The VIX and VXN are starting to fall back down to those fearless
levels where bulls get burnt.
VIX 22.29
VXN 47.67
-----------------------------------------------------------------
Put/Call Ratio Call Volume Put Volume
Total .56 584,554 325,511
Equity Only .48 532,354 256,778
OEX .84 15,567 13,108
QQQ .82 42,410 34,779
-----------------------------------------------------------------
Bullish Percent Data
Current Change Status
NYSE 34 - Bear Confirmed
NASDAQ-100 24 - Bear Confirmed
DOW 30 - Bear Confirmed
S&P 500 48 - Bull Correction
S&P 100 38 - Bull Correction
Readings above 70 are considered overbought, and readings below
30 are considered oversold.
Bull Confirmed - Aggressively long
Bull Alert - Cautiously long
Bull Correction - pause or pullback in upward trend
Bear Alert - Take defensive action if long
Bear Confirmed - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend
-----------------------------------------------------------------
5-Day Arms Index 1.03
10-Day Arms Index 1.28
21-Day Arms Index 1.25
55-Day Arms Index 1.28
Extreme readings above 1.5 are bullish, and readings below .85
are bearish. These signals don't occur often and tend be early,
but when the do, they can signal significant market turning
points.
-----------------------------------------------------------------
Advancers Decliners
NYSE 1940 1119
NASDAQ 2268 1340
New Highs New Lows
NYSE 145 37
NASDAQ 63 88
Volume (in millions)
NYSE 1,058
NASDAQ 1,492
-----------------------------------------------------------------
Advisory Sentiment
Bullish Bearish Correction Net Change
49.0% 29.1% 21.9% 19.9% +0.9%
A bearish reading of 25% to 30%, combined with a bullish reading
greater than 55% is typically considered bearish by contrairians.
A net percentage greater than 30% is also viewed as bearish.
-----------------------------------------------------------------
Commitments Of Traders Report: 08/21/01
Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the
Chicago Mercantile Exchange and Chicago Board of Trade. COT data
can be found at www.cftc.gov.
Small specs are the general trading public with commercials being
financial institutions. Commercials are historically on the
correct side of future trend changes while small specs tend
to be wrong.
S&P 500
Flat line. Commercials' net position hasn't budged in three
weeks.
Commercials Long Short Net % Of OI
8/07/01 331,881 406,210 (74,329) (10.07%)
8/14/01 337,327 411,504 (74,177) ( 9.91%)
8/21/01 342,332 416,372 (74,040) ( 9.76%)
Most bearish reading of the year: (111,956) - 3/6/01
Most bullish reading of the year: ( 41,144) - 5/1/01
Small Traders Long Short Net % of OI
8/07/01 128,454 53,191 75,263 41.43%
8/14/01 130,432 55,750 74,682 40.11%
8/21/01 134,280 58,785 75,495 39.10%
Most bearish reading of the year: 36,513 - 5/01/01
Most bullish reading of the year: 91,122 - 3/06/01
NASDAQ-100
Commercials have gotten slightly more bearish. It looks like a
range is setting up between (8,000) and (10,000). See chart
below.
Commercials Long Short Net % of OI
8/07/01 28,867 38,956 (10,089) (14.88%)
8/14/01 29,909 37,822 ( 7,913) (11.68%)
8/21/01 30,348 38,964 ( 8,616) (12.43%)
Most bearish reading of the year: (15,521) - 3/13/01
Most bullish reading of the year: (1,825) - 1/02/01
Small Traders Long Short Net % of OI
8/07/01 9,715 8,098 1,617 9.08%
8/14/01 11,165 9,508 1,657 8.02%
8/21/01 10,499 7,576 2,923 16.17%
Most bearish reading of the year: (1,028) - 1/02/01
Most bullish reading of the year: 8,460 - 3/13/01
DOW JONES INDUSTRIAL
Commercials are closing in on their most bullish reading of the
year, 8,925 set back on May 22nd.
Commercials Long Short Net % of OI
8/07/01 18,644 13,733 4,911 15.2%
8/14/01 21,652 15,856 5,796 15.5%
8/21/01 22,710 14,625 8,085 21.7%
Most bearish reading of the year: (8,322) - 1/16/01
Most bullish reading of the year: 8,925 - 5/22/01
Small Traders Long Short Net % of OI
8/07/01 4,841 9,909 (5,068) (34.36%)
8/14/01 4,441 8,528 (4,087) (31.51%)
8/21/01 5,059 10,410 (5,351) (34.59%)
Most bearish reading of the year: (7,572) - 5/08/01
Most bullish reading of the year: 1,909 - 1/16/01
COT Commercial Net Position Charts
***************
ASK THE ANALYST
***************
Prescient Analysis
By Eric Utley
I phoned into the psychic hotline last week in search of a clue.
Apparently I don't have one according to a not-so-favorite peer
of mine. Anyway, I'd grown tired of reading the Tao Te Ching and
figured a swami could help. After all, fortune tellers specialize
in the areas of money, love, happiness, peace of mind, and
success. And of course those things are of concern to me, so I
dialed into the hotline.
After my "personal psychic" assimilated and read my fortune, which
was less-than-inspiring, I thought I'd get her take on the market.
Our conversation took place Wednesday evening, and went something
like this:
"So, Sally the Swami, where's the easy trade tomorrow (Thursday)?,"
I asked.
Sally replied in a condescending tone, "Eric, you know there's no
such thing as the 'easy' trade, especially in this market. Don't
be silly! Quite frankly, I'm a little disappointed in you. You
call yourself a pro? Huh!?"
"Easy, Sally, easy. I hear ya', it's just that I've got this
funny feeling down in my gut that the move in the biotechs today
has legs. I didn't tell you before you read my fortune, but I've
been hand charting the Nasdaq-100 components for quite some time
now. As you well know, the NDX includes quite a few biotechs,
and..."
Sally interrupted, "Wait, didn't I ask for you to be completely
open and honest with me before I read your fortune?" She grew
rude, "What the hell do you mean you've got a 'funny feeling'
about the biotechs!?"
I apologized, "Look, I'm sorry I didn't tell you about my hand
charting. It's personal stuff, and I don't like to talk about
it." I then opened to her and elaborated, "But ever since I
started hand charting the 100 stocks in the NDX, I've 'sensed'
moves beforehand. I mean, it's almost like I can predict the
future movement in certain stock prices at certain times. To
be quite honest, it's a little spooky."
Sally questioned, "Sounds like blatant speculation to me, don't
ya' think?"
"You're right," I replied, "It's no more than speculation and
that's why I usually don't act on the feelings. Like I told
you before, I use a balanced approach of price action and a
fundamental backdrop, and only then incorporate my hand charting
findings." I then reiterated, "But I'm telling you, I 'sense'
that the biotechs go higher from here and the BTK's move back
above 500 today only reinforces my feeling."
Sally's tone changed, "Well, you are a Capricorn and your
associated planet is Saturn, which just happened to line up
with Jupiter yesterday (Tuesday). And by the way, Jupiter
signifies expansion of awareness."
I snapped back, "Whatever. I just feel that the biotechs go
much higher and soon, my charts are 'telling' me that much.
You might do well to pick up some Biotech HOLDRs or a few lots
of Amgen or Biogen for a trade into Friday. Anyway, maybe I'll
phone in again next week, Sally, this has been a liberating
conversation. Good bye."
Please send your questions and suggestions to:
Contact Support
----------------------------
Adobe Systems - ADBE
Please advise support and resistance for Adobe. Is it correct
to assume that the stock is on a rising trend now? - Thanks,
Sunil
Thanks for the question, Sunil.
Before we get into the technicals of Adobe (NASDAQ:ADBE), let me
offer a take on the software sector. The sector, as measured by
the GSO.X, has traded incredibly poorly recently relative to the
broader tech space. But Adobe, a component of the GSO, has
traded "better" than its sector. Here's the current dynamic:
Terrible sector, but Adobe is trading relatively "better."
The following chart displays the GSO's relative strength versus
the Nasdaq-100 (NDX.X). (This chart was created in QCharts
using the following operative: GSO.X /NDX.X - you can compare
any two securities and/or markets in QCharts by using that
sequence of symbols.) There are a few things to note on this
chart. First, the trend of the line simply indicates that the
GSO has been falling faster than the NDX. Second, the GSO
is currently trading as poorly as it was in April. In other
words, the GSO is at relative strength lows.
Contrasting the GSO's relative strength chart to its actual
daily price action reveals an interesting divergence. That
is, the GSO isn't trading at its April lows but its relative
strength versus the NDX is. I'm not certain, but I wonder
if this divergence is an indication of a capitulation of sorts,
or a weeding out of the weak hands in the software sector?
Moreover, I rolled a retracement bracket down on the GSO and
discovered another very interesting development. The chart above
displays the bracket I used and pins the 50 percent level right
at 160. Not by coincidence, the GSO refused to trade below 160
last week. This retracement bracket combined with the GSO's
relative strength readings make for some interesting speculation.
Nevertheless, the GSO is trading poorly versus most of tech. And
picking bottoms is a dangerous game!
(I assume Sunil has a bullish stance on Adobe, judging by the
nature of his question. I think that it's more prudent to search
for bullish plays in sectors that are trading relatively better,
such as the Semis or Biotechs. So, keep in mind that the GSO is
under performing, and trading from the long side in a weak sector
is more difficult.)
Judging by Adobe's MACD, the stock is back in an advancing trend.
The signal line and MACD crossed over last week, and the
histogram up-ticked Wednesday, Thursday, and Friday. Overhead
resistance is located at $37.50, followed by the stock's long
standing descending trend line, which currently lies around $41.
The $35 level could serve as support after Friday's finish, but
if it doesn't hold, Adobe should continue to find support around
the $32.75 level as it has done in the recent past. Below there,
the $30 level could attract buyers.
----------------------------
QLogic - QLGC
What is your opinion [on] Qlogic? When ever this stock goes down,
it comes roaring back. Is it the best stock in storage industry?
- Thanks, Jay
Jay, thanks for the question and I think a concession is in order
on my part, which was inspired by your question. Long-time
readers of this column know that I was a champion of the storage
sector earlier this year. I liked the group, especially certain
well-run companies, for the seemingly endless demand for the
storage of data. But like ALL of the other information technology
businesses, data storage has been broken by the current economic
downturn. I don't want to lose credibility with my readers -
that's all I've got. But at the same time, I, as a trader, have
to be adaptable. With that in mind, let's tackle QLogic
(NASDAQ:QLGC).
I don't know if QLogic is the best stock in the storage industry,
but because you asked, Jay, I think we should compare QLogic to
its sector. QLogic is at what appears to be a pivotal point. I
pulled up a chart of its relative strength versus the Hardware
Index (GHA.X) and found something interesting. (I chose the
Hardware Index because QLogic caters to the data storage space,
and it's a component. Others might argue that it trades more
in synch with the Semiconductor Index (SOX.X), but I disagree.)
The chart below compares the relative strength of QLogic versus
the Hardware Index. As you can see, the stock is in the middle
of its recent range and has traced a couple of three box
reversals recently. Those recent reversals have given QLogic
the potential to make a big move in one direction or another
very soon. Like a standard point & figure chart, QLogic will
give a buy or sell signal when a previous column of X's or O's
is taken out, respectively.
We can use this chart to discern at what exact price QLogic will
begin to out perform or under perform the GHA, thereby determining
the "best" time to buy the stock or short it. Here's the
formula:
Take the number at which QLogic would give a buy signal from the
right column. At this point, QLGC will go on buy at 15.00. Then
divide that number (15.00) by the divisor of the GHA, which is
100. (For a $5 stock, the divisor is 1, for a $50 stock, the
divisor is 10, for a $100 stock, the divisor is 100, for a 1916.80
index, the divisor is 1000, et cetera.) After dividing the buy
signal point (15.00) by our divisor of 100, we arrive at a
multiplier of 0.15. We then multiply that ratio by the current
price of the GHA, which is 257.08, to arrive at the price of
QLogic when it will go on a buy signal, or:
(15.00/100) * 257.08 = $38.562
To determine the price at which QLogic will go on a sell signal,
we simply take the number from the right column of the chart
where QLogic will generate a sell signal; in this case, the
sell signal is at 12.50.
(12.50/100) * 257.08 = $32.135
So now we have two pivot points for QLogic, a buy pivot point at
$38.562 and a sell pivot point at $32.135. I think that a
trader could implement a position using this strategy after
confirming direction in the Hardware Index. In other words, if
the GHA is advancing and QLGC prints $38.562 it could then be
bought for a short-term trade. Or if the GHA is declining and
QLGC prints $32.135 it could then be shorted. It's a momentum
strategy, though, so take that much into account.
If a trader were to implement this strategy, she/he could then
use some retracement brackets to determine exit points should
QLogic give either a buy or sell signal. I tinkered around with
a few different anchor points and came up with some levels on
the chart below. Note: The 50 percent retracement of the blue
bracket lies right around our buy signal at $38.71.
----------------------------
DISCLAIMER:
This column is an information service only. The information
provided herein is not to be construed as an offer to buy or
sell securities of any kind. The Ask the Analyst picks are not
to be considered a recommendation of any stock or option but an
information resource to aid the investor in making an informed
decision regarding trading in options. It is possible at this
or some subsequent date, the editor and staff of The Option
Investor Newsletter may own, buy or sell securities presented.
All investors should consult a qualified professional before
trading in any security. The information provided has been
obtained from sources deemed reliable, but is not guaranteed
as to its accuracy.
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*************
COMING EVENTS
*************
===============================================================
Economic Reports
Existing home sales for July will kick off the shortened holiday
week. Tuesday brings in the consumer confidence report for
August, with expectations for higher figures from July, and
Thursday hails in new numbers for personal income, spending, and
jobless claims. Personal income figures are likely to be flat,
with a slight increase in spending.
===============================================================
Week of August 27, 2001:
Monday, 08/27/01
Existing Home Sales Jul Forecast: 5.30M Previous: 5.33M
Tuesday, 08/28/01
Consumer Confidence Aug Forecast: 117.5 Previous: 116.5
Wednesday, 08/29/01
GDP-Prel Q2 Forecast: 0.0% Previous: 0.7%
Chain Deflator-Prel Q2 Forecast: 2.3% Previous: 2.3%
Thursday, 08/30/01
Initial Claims 8/25 Forecast: 400K Previous: 393K
Personal Income Jul Forecast: 0.3% Previous: 0.3%
PCE Jul Forecast: 0.1% Previous: 0.4%
Help-Wanted Index Jul Forecast: N/A Previous: 58
Friday, 08/31/01
Mich Sentiment-Rev Aug Forecast: 93.3 Previous: 93.5
Chicago PMI Aug Forecast: 40.5% Previous: 38.0%
Factory Orders Jul Forecast: -0.5% Previous: -2.4%
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The Option Investor Newsletter Sunday 08-26-2001
Sunday 2 of 5
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BROKERS CORNER
**************
Credit Spreads in Any Market
By Robert J. Ogilvie
The most common use of credit spreads is the put credit spread.
It is also known as a bull put spread. Most of us wouldn't even
consider the concept of initiating anything with a bullish
strategy. The reason to consider credit spreads is to offer an
alternative to naked puts.
Many investors selling naked puts really don't intend on buying
the shares if assigned. Most are trying to take advantage of
the margin leverage and the potentially high returns on the
money held as collateral. The problem is that many overextend
themselves and aren't prepared to cover the margin requirement
if the security drops. Suppose we take the minimum account size
for many firms of $25,000. If we sell 20 contracts of Sept 30
puts at $1.00/contract on a $35 security, the initial margin
requirement is $9,000. For an explanation of naked put margin
requirements, you can find my article Margin Monster in the
Broker's Corner section of the website or email me for the
articles. However, it will cost $60,000 or $30,000 cash and
margin to buy if assigned. The initial return on the $9,000 is
good at 22.2%. However, the return on the capital if assigned
is 3.3%. There are many arguments on calculating returns. The
best way is to take the account balance after closing out the
position and divide it by the beginning amount. Then subtract
1. In the above example, if the put expires worthless, there
will be an 8% return. When I mentioned that some investors
overextend their account, I am referring to those traders that
enter other positions in order to maximize the accounts
potential. The problem is that the margin requirements
increase as the stock drops. If the stock dropped to 30 and
the premium increased to $3/contract, the margin requirement
would be $18,000. This only leaves $7,000 cash for other
positions. If we had another position that cost more than
$7,000, we would get a margin call. So don't bite off more
than you can chew. Only sell a number of contracts that you
can afford to purchase the stock. In the above example, I
would only suggest 10 contracts. That leaves room for more
positions and greater flexibility.
Now that the lecture is done, the benefit to credit put spreads
is to take advantage of selling the premium without the risk of
the margin requirement changing. A credit put spread is
initiated by selling a higher strike price put (short put) and
buying a lower strike price (long put). To figure the margin
requirement on a credit spread take the difference between the
two strike prices and multiply it by the number of contracts.
Then multiply that number by 100. Credit spreads usually provide
great returns on the money used for collateral. However, the
maximum loss is the margin requirement less the premium.
Example:
Buy 20 Sept 55 Puts for $1.30
Sell 20 Sept 60 Puts for $2.60
Credit = $1.30 X 20 contracts = $2,600
Margin requirement = $10,000, or
($5 X 20 Contracts X 100 Shares/Contract)
Minimum Cash Requirement $8,400 = $10,000 - $2,600.
An example of entering this trade is as follows. Suppose we
determine that XYZ is oversold and that it is about to start
heading up. It is currently trading at $36 with previous
support between 33.5 and $34. If I am aggressive and confident
I will sell the 35 puts for $2.30/contract and buy the 30 puts
for $0.80/contract. That is a $1.50 credit. If I am not as
confident, I will sell the 30 puts for $0.75/contract and buy
the 25 puts for $0.20/contract. The credit of $0.55 is far
less than the $1.50 on the aggressive position. This is a good
example of risk/reward. The aggressive scenario provides me
with a favorable cost basis of $33.50 if assigned. If the
stock dropped below the cost basis, I won't stay in this
position. The only reasons to stay in the spread are because
I FEAR I may lose money and my GREED doesn't want me to sell
the position and miss out on the move back up I HOPE happens
(a reference to Tues. Hope, Fear, & Greed article).
Credit spreads are somewhat flexible. If the stock moves up,
one option is to buy the short put to close and leave the long
put open in case the stock drops back down. The problem with
this is that many times, there isn't enough time left to take
full advantage of the decline. One solution is to initiate a
position with a few months until expiration. The opposite
strategy, selling the long put to close at a profit if the
underlying security declines, can be applied for those who
are more aggressive and can afford to be naked on the short put.
Entering a credit put spread can be done in various ways. Just
as one might exit one side of the spread at a time, the same is
also true for entering. This is called legging into the spread.
Legging in is a very risky strategy that can be very costly. I
normally leg in using the volume and price on the various
exchanges. My trading platform allows me to have two separate
orders prepared at the same time to take advantage of timing.
Most brokers or traders don't have this function. Timing the
price to enter is very important. I look for oversold
conditions in the security with a move to the upside in the
markets and the security as a confirmation. The strike price
depends on where the next support level is in relation to the
strike price and the security.
Be prepared to lose your entire margin requirement. But don't
let that happen. If the security doesn't perform to your
expectations, don't let hope, fear, and greed determine the
position's fate. Pride has no place in trading. Exit
strategies to consider are the following: close at the break of
the underlying security's next support level; close at the cost
basis of the underlying security if assigned (short strike
price less the net premium); close at the short strike price;
close if the security advances upward and indicates overbought.
Granted strategies like credit spreads, covered calls, and out
of the money naked puts they are better suited for uptrending
markets, they are also good in consolidating or declining
markets. There is no reason to avoid trading entirely. In any
market, trade cautiously and never blindly. As a full service
options broker, I am happy to discuss your current holdings and
possibly aid you in determining whether to sell or hold or
reposition entirely in another strategy.
Happy trading!
Robert J. Ogilvie, ROP
Robert.Ogilvie@verizon.net
I am an Options Broker and ROP that trades for and educates
investors on many strategies. Please contact me via email with
any questions.
Neither Cutter & Company, Inc. nor Robert J. Ogilvie makes any
representation as to the accuracy, reliability or completeness
of any charts, formulas, and /or research opinions presented
herein. This article is intended solely for educational
purposes. Nothing herein should be construed as an offer or
solicitation to buy or sell any securities. Cutter and Company
is a Member of the NASD, MSRB, and SIPC. Please read Option
Investor's Disclaimer:
http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
********************
THE PLAYS OF THE DAY
********************
Call Play of the Day:
*********************
ELNT - Elantec Semi $39.90 (+2.79 last week)
See details in sector list
Put Play of the Day:
********************
AIG - American International Grp. $77.20 (-2.01 last week)
See details in sector list
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**************************
PICKS WE DROPPED THIS WEEK
**************************
Remember that historically, when we drop a pick it will go up
10 to 15% the very next week. It is part of Murphy's Law.
Just because we drop a stock as a pick does not mean we are
advocating a "sell" on any position you have. We are simply
dropping our recommendation as a new play. Existing plays
can and do continue on and are usually profitable.
CALLS
No Dropped Calls This Weekend
PUTS
PSFT $37.15 (+1.30) PSFT appears to be forming around its current
levels and last Friday's short covering in the software sector
certainly didn't further our bearish cause. The stock could
rollover from current levels as it's having difficulty surpassing
$38, but we're being cautious and choosing to drop coverage this
weekend.
GS $81.30 (+4.05) There appeared to be a large rotation into the
brokers last Friday that caught us by surprise. GS was a
recipient of the buying pressure as the stock easily advanced
past our stop at the $80 level. As such, we're dropping coverage
this weekend.
CLS $41.48 (+2.01) On the heels of positive comments from CSCO,
and good news from MSFT, the broad markets posted their best day
in over a month and CLS went along for the ride. It's hard to
say if the overall move has any staying power, but the fact that
CLS advanced to close at its high of the day is not a good sign.
Given the rally through the $40 level we'll pull in our claws
and exit the play this weekend, rather than wait for the bulls
to take our stop next week.
LEH $68.35 (+4.35) There was no ambivalence in Friday's rally in
shares of LEH, as the brokerage stock gained better than $4,
vaulting through our $68 stop on heavy volume. This was in
contrast to the broad market, which saw only mediocre volume,
which adds significance to LEH's positive move. The sharp
rebound from the $64 support level, coupled with our violated
stop has us exiting LEH this weekend.
VRTS $35.49 (+2.54) VRTS was due for an oversold bounce, after
the recent decline, but the magnitude of the rebound was a bit
more than we could tolerate. While volume was nothing
spectacular, the stock managed to clear our $35 stop and close
near the high of the day. Despite our expectations that next
week could be another party for the bears, we have to abide by
our stop, exiting VRTS this weekend.
***********
DEFINITIONS
***********
SL = Suggested stop loss. Sell if bid breaks this price.
OI = Open Interest - the number of open contracts outstanding.
ITM = In the money
ATM = At the money
OTM = Out of the money
ADV = Average Daily Volume
The options with a "*" by the strike price are our choices from the
group. If the stock moves as expected we feel they have the best
chance to substantially increase or double in price with the best
risk/reward ratio compared to the other options for the same stock.
You must determine if they fit your risk profile for time and price.
Analysts ratings: 1-2-3-4-5
Analysts who follow each stock rate it and these rating are
accumulated and displayed as follows;
Position 1 = number of analysts recommending "strong buy"
Position 2 = number of analysts recommending "moderate buy"
Position 3 = number of analysts recommending "hold" or "neutral"
Position 4 = number of analysts recommending "moderate sell"
Position 5 = number of analysts recommending "strong sell"
Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys",
1 "hold" recommendation.
RISKS of SELLING PUTS:
The risk of selling naked puts is always the possibility
of a catastrophic event that drops the stock below the
strike price and could result in the stock being PUT to you.
Always protect yourself with a "buy to cover" limit order
to take you out before this can happen.
**************
NEW CALL PLAYS
**************
FFIV - F5 Networks $16.76 (+2.17 last week)
F5 Networks, Inc. is a provider of integrated Internet traffic
and content management solutions designed to improve the
availability and performance of mission-critical Internet-based
servers and applications. The Company's products monitor and
manage local and geographically dispersed servers and
intelligently direct traffic to the server best able to handle a
user's request. Its content management products enable network
managers to increase access to content by capturing and storing
it at points between production servers and end users and ensure
that newly published or updated files and applications are
replicated uniformly across all target servers.
Cisco's comments last Thursday evening only added to FFIV's
recent momentum. The stock has been on a steady rise for the
past two weeks and looks to be headed higher over the short-term.
FFIV is above most of its near-term, meaningful resistance levels
and is poised to retest its recent relative high around the $19
level. But make no mistake about it, this is a momentum play so
those traders who don't prefer this type of strategy should take
note before considering entering new positions. However, for
those who do like the momentum strategy, look for follow-through
early next week. New positions can be taken on an advance above
Friday's intraday high at $17.05, just make sure to confirm strong
volume on any further strength from current levels. In addition
to volume, confirm direction in the Network Sector Index (NWX.X)
when pursuing the stock into strength. And as we previously
stated, our short-term price target is around the $19 level.
That's about $2 away from current levels, and should translate
into a solid gain in FFIV's options should the target be reached.
If profit taking becomes FFIV early next week, look for a bounce
from support either at $16, or lower around the $15 level. We're
initially setting stops at the $14.50 level. Finally, traders
might do better to use higher delta contracts for this play,
which should allow for easier risk management and more
responsiveness should FFIV work in our favor.
BUY CALL SEP-15.0*FLK-IC OI=403 at $2.90 SL=1.75
BUY CALL SEP-17.5 FLK-IW OI=248 at $1.40 SL=0.50
BUY CALL OCT-15.0 FLK-JC OI=307 at $3.50 SL=2.25
BUY CALL OCT-17.5 FLK-JW OI=216 at $2.20 SL=1.50
Average Daily Volume = 622 K
IWOV - Interwoven $7.98 (+0.94)
Interwoven, Inc. provides software products and services that
help businesses and other organizations manage the content of
their Websites. Interwoven operates in the Internet industry
engaged in Web content management. The Company's flagship
software product, TeamSite, is designed to help customers
develop, maintain and extend large Websites that are essential to
their businesses. Using TeamSite, the Company's customers can
manage Web content, control the versions of their Websites,
manage Website contribution and content approval processes, and
develop e-business applications.
The technical set-up in IWOV makes for a compelling bullish
trade. Add the fact that the Software Sector is oversold and
we have a potential solid play in the making. There's no
denying that software issues have been heavily shorted recently
and judging by last Friday's price action, the bears may have
grown a bit greedy. The Software Sector Index (GSO.X) staged
a big rebound, which allowed for IWOV to close above its 10-dma
for the first time in about one month. Its 10-dma currently
resides at $7.37. In addition to its settlement above the 10-day,
IWOV is coming off a double bottom around the $6 level. Its
most recent trip back down to that level may have been the
retest and now the stock is ready to climb back towards the $10
level, which would make for a solid trade should it transpire.
Along with the technical developments on IWOV's daily chart,
breaking the stock down to a shorter time frame, such as 60-
minute, reveals that a short-term base has been formed. A
breakout above this base would occur if IWOV advances above the
$8 level on heavy volume. Traders who enter on a breakout can
confirm direction with an advance above the $8.36 level.
Thereafter, resistance exists at the $9 level, and higher at
our short-term price target at $10. For those who use an
advance above the $8 level to enter new plays, make sure to
confirm direction in the GSO when doing so. Initially, we're
setting our stops at the $6.25 level, but traders should use
their own best judgment when determining specific stop levels.
BUY CALL SEP- 5.0 IUW-IA OI= 36 at $3.20 SL=2.25
BUY CALL SEP- 7.5*IUW-IU OI=960 at $1.20 SL=0.50
BUY CALL SEP-10.0 IUW-IB OI=574 at $0.50 SL=0.00
BUY CALL OCT- 7.5 IUW-JU OI= 57 at $1.70 SL=0.75
BUY CALL OCT-10.0 IUW-JB OI= 33 at $0.85 SL=0.25
Average Daily Volume = 3.33 mln
NXTL - Nextel Communications $12.54 (-0.17 last week)
Nextel Communications, Inc. provides a wide array of digital
wireless communications services throughout the United States.
The Company offers a differentiated, integrated package of
digital wireless communications services under the Nextel brand,
primarily to business users. The Company's digital mobile network
utilizes a single transmission technology that was developed by
Motorola, Inc., and is referred to as integrated Digital Enhanced
Network (iDEN) technology. As of December 31, 2000, the Company
had close to 6.7 million digital handsets in service in the
United States.
Analysts are predicting that the wireless segment of the telecom
business will be the first to up-tick when the sector rebounds.
Several stocks within the group are already showing signs of
strength. That may morph into bids for shares of NXTL in the
coming weeks. For its part, NXTL staged a solid rebound late
last week, which may portend a reversal of trend in the coming
sessions. The stock set a low at $11.18 in early April, and
its recent weakness may very well have been the retest that
technicians frequently call for. It NXTL's dip down to the
$11.50 level last week was the retest of its bottom in early
April, then the stock successfully traced a double-bottom, which
is a technical price pattern that often portends future strength.
The stock hovered around the $12.50 level late last Friday, which
could be the beginning of a base that launches NXTL higher
early next week. Bullish traders will want to see the $12.50
level hold in the coming sessions. If it does, supply will
eventually subside and NXTL should move higher. In terms of
execution, bullish traders can use an advance above last Friday's
intraday highs at $12.69 to enter new call positions. Those
who prefer entering on weakness can use a dip down to the $12
level. NXTL doesn't have much in the way of meaningful
resistance until the $13.65 level, which is about $1 higher from
current levels. Meanwhile, our stop resides at the $11.50
level, which gives a fairly equal reward to risk ratio over the
short-term. For those with a longer timeframe, NXTL could
make its way up to the $15 level over the intermediate-term,
which gives the play a much better reward to risk ratio as it
stands now.
BUY CALL SEP- 7.5 QXN-IZ OI= 62 at $2.80 SL=1.75
BUY CALL SEP-10.5*QXN-IB OI=4903 at $1.00 SL=0.50
BUY CALL OCT-10.0 QXN-JB OI=8749 at $1.55 SL=0.75
BUY CALL OCT-12.5 QXN-JV OI=1116 at $0.70 SL=0.25
Average Daily Volume = 10.1 mln
CY - Cypress Semiconductor $23.90 (+0.91 last week)
Cypress designs, develops, manufactures and markets digital and
mixed-signal integrated circuits for a wide range of markets,
including telecommunications, computers, data communications, and
instrumentation systems. For the 3 months ended 4/1/01, revenues
declined 1% to $262.3M. Net income fell 80% to $10.5M. Results
reflect lower sales from the wireless terminal and infrastructure
divisions and non-recurring charges of $23M related to
acquisitions.
Stability in the semiconductor sector could be near on the horizon
after last night's CSCO announcement. Today's solid move in CY
shares has brought the stock back up beyond the 10 and 50 DMA's
after two days of increasing upside volume and there is a good
chance that today's close at short-term resistance could be
followed on Monday by a push through the level. Consider that the
slowdown in the chip sector was near its height in the latter half
of last year, and you'll realize that a year over year earnings
comparison could prove to be quite favorable. If volume returns
on Monday and shorts continue to cover, CY could see a move
through its 20 DMA at $25.02 and a further move to the next level
of resistance just under $26.00. This is where we would choose to
exit the trade if our focus was on the short-term. Longer term
holders may see an opportunity for shares to move to $28.00,
testing the nest level of resistance. Set your stop at $20.00 to
avoid being stopped out on retracement.
BUY CALL SEP-20 CY-ID OI=1530 at $4.40 SL=2.25
BUY CALL SEP-25*CY-IE OI=3313 at $1.00 SL=0.50
BUY CALL OCT-20 CY-JD OI= 2 at $4.80 SL=2.50
BUY CALL OCT-25 CY-JE OI= 436 at $1.90 SL=1.00
Average Daily Volume = 1.9 mln
JBL - Jabil Circuits $24.86 (+2.06 last week)
Jabil Circuit designs and manufactures electronic circuit board
assemblies and systems for original equipment manufacturers in the
communications, computer peripherals, personal computers, and
consumer product industries. For the 6 months ended 2/01, revenues
rose 53% to $2.34B. Net income rose 46% to $88.5M. Results reflect
increased production of communication and personal computer
products, partially offset by lower levels of capacity
utilization.
Shares of JBL look ripe for the picking. After testing support
just above $22.00, the stock began a classic V bottom pattern that
it has maintained all the way back up to the 10 DMA at $24.74.
The encouraging aspect is that shares have performed well on down
days in the sector this week and now rests just above the gap down
that it experienced a week ago today. Filling this gap could be a
positive sign and rebounding technical indicators point to
additional upside. The next level of resistance rests at the 50
DMA of $27.51 and should shares test that level, it would
represent a nearly +15% gain. It is at this level that we
recommend short-term traders consider closing their position.
Those with a longer-term focus have much more to consider.
Additional resistance presents itself at the 100 DMA a dollar
higher and still another arrives on the scene at about $29.50. We
like the chances for JBL to test $30.00 and suggest that if you
tend to hold for more than a few days, consider this level as your
exit point. Set the stop loss at $21.00.
BUY CALL SEP-20 JBL-ID OI= 957 at $5.70 SL=3.25
BUY CALL SEP-25*JBL-IE OI=1603 at $2.30 SL=1.25
BUY CALL OCT-20 JBL-JD OI= 0 at $6.50 SL=4.00 Wait for OI!!
BUY CALL OCT-25 JBL-JE OI= 208 at $3.30 SL=1.50
Average Daily Volume = 2.2 million
VRSN - VeriSign, Inc. $47.01 (+0.36 last week)
VeriSign is the leading provider of Internet trust services
and digital certificate solutions needed by Web sites,
enterprises and individuals in order to conduct secure
electronic commerce and communications over IP networks. VRSN
has used its secure online infrastructure to issue over 100,000
of its Website digital certificates and over 3.5 million of its
digital certificates for individuals. The company also offers
the VeriSign Onsite service, which allows an organization to
leverage the company's trusted service infrastructure to develop
and deploy customized digital certificate services for use by an
organization's employees, customers and business partners. To
date, over 300 enterprises have subscribed to the OnSite service
and VRSN has strategic relationships with industry leaders
including Cisco, Microsoft ,RSA, Security Dynamics, and VISA.
Who says the Internet is dead? Contrary to popular opinion, not
all Net stocks are a bad idea, just the ones with a poor
business plan, and no defined market dominating position.
Neither of those describe VRSN, which is one of the leading
companies providing security for the increasing number of
accounts, files and transactions that exist in the Wild West we
know as cyberspace. The past month has not been kind to VRSN
shareholders as they have watched their stock once again decline
into the low $40s. Fortunately for them, the stock began to
firm in the $43 area and then launched higher on Friday thanks
to the strength in the Technology market, due in large part to
positive developments for both CSCO and MSFT. Daily Stochastics
are emerging from oversold territory after Friday's $3 gain, but
we're a little concerned about the volume, which only came in at
about two-thirds of the ADV. Look for reinvigorated bulls to
bid the stock through the $47.50 level (the site of the 50%
retracement of the spring rally) on increasing volume to trigger
momentum-based entries. Otherwise, look for a pullback to
support in the $43-44 area to provide attractive entries. Set
stops at $42.
BUY CALL SEP-45 QVR-II OI=1649 at $5.00 SL=3.00
BUY CALL SEP-50*QVR-IJ OI=2034 at $2.45 SL=1.25
BUY CALL SEP-55 QVR-IK OI=1632 at $1.20 SL=0.75
BUY CALL NOV-45 QVR-JI OI= 278 at $7.10 SL=5.00
BUY CALL NOV-50 QVR-JJ OI= 121 at $4.60 SL=2.75
BUY CALL NOV-55 QVR-JK OI=1068 at $3.00 SL=1.50
SELL PUT SEP-45 QVR-UI OI=1456 at $2.90 SL=5.00
(See risks of selling puts in play legend)
Average Daily Volume = 6.82 mln
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The Option Investor Newsletter Sunday 08-26-2001
Sunday 3 of 5
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******************
CURRENT CALL PLAYS
******************
ELNT - Elantec Semi $39.90 (+2.79 last week)
Elantec is a designer, manufacturer and marketer of high
performance analog integrated circuits, which provide specific
analog solutions to manufacturers in the high growth markets for
video, optical storage, communications and power management
products.
ELNT's price action last Friday proved once again that a buyer
is lurking in the stock. Each time the broader market and sector
show any signs of strength, ELNT pops higher. The Semiconductor
Sector (SOX.X) performed quite well Friday and that no doubt had
a positive impact on ELNT. But we noticed some interesting price
behavior at the $40 level last Friday. Each time ELNT traded up
to that level, a seller knocked the stock back down, albeit only
fractionally. With this new seller detected, ELNT appears to be
at a crossroads of sorts. The stock has the potential to make a
big move in the coming week, and we're leaning towards an upside
move because of its recent trend. But for ELNT to breakout above
$40, the seller at that level needs to be overwhelmed with
demand. And that's only going to happen if the SOX and COMPX
continue firming. If ELNT breaks out early next week, traders
might wait for confirmation with an advance above roughly $40.75.
If that sequence of events take place, we're likely to witness
ELNT advance beyond its relative high around $41.50. In fact,
a rally up to $47 is not out of the question. So the plan of
attack is to enter on a volume-backed move above $40 to $40.75,
in conjunction with an advancing SOX and COMPX. Otherwise, those
traders who prefer entering on dips can wait for a light volume
pullback down to support at $38, or lower around $36.
BUY CALL SEP-35 UET-IG OI=235 at $6.90 SL=4.50
BUY CALL SEP-40*UET-IH OI= 80 at $3.50 SL=2.00
BUY CALL NOV-35 UET-KG OI=611 at $9.50 SL=6.75
BUY CALL NOV-40 UET-KH OI=355 at $6.70 SL=4.50
Average Daily Volume = 521 K
PG - Procter & Gamble $77.00 (+2.25 last week)
Procter & Gamble manufactures and markets a broad range of
consumer products in many countries throughout the world. The
company's products fall into five business segments: Fabric
and Home Care, Paper, Beauty Care, Health Care, and Food and
Beverage.
PG has had some trouble with clearing the $77 level in the past,
so traders with open positions and good gains in this play may
be looking to take some profits off the table up here. It
was a little discouraging not to see PG participate last Friday
with the Dow Jones Industrial Average (INDU) and the S&P 500
(SPX.X) - both of which had great days. Perhaps PG's under
performance is a prelude to profit taking next week. But we
did notice that PG traded in a relative tight range last Friday,
with a pattern of higher lows developing. Nevertheless, we
need to see the stock resume its advancing trend early next
week, otherwise a pullback seems inevitable. A trade up to the
$78 level would signal that the buyers in the stock are
willing to continue carrying it higher. But a pullback at this
point wouldn't necessarily be a bad thing, so long as traders
with open positions have the appropriate risk management
measures in place. A pullback would, however, offer those not
yet in the play a chance to gain a favorable entry point. From
here, a light volume retreat down to the $76 level could offer
an entry, while weakness down to the $75 level would do the
same. Just make sure that the buyers step in to prop the stock
up off of support before entering on weakness.
BUY CALL SEP-70 PG-IN OI=1082 at $7.50 SL=5.00
BUY CALL SEP-75*PG-IO OI=5821 at $3.20 SL=2.00
BUY CALL OCT-70 PG-JN OI=8480 at $8.00 SL=5.25
BUY CALL OCT-75 PG-JO OI=9635 at $4.10 SL=2.50
Average Daily Volume = 2.82 mln
NVDA - NVIDIA $85.28 (+1.54 last week)
NVIDIA designs, develops and markets graphics processors and
related software for personal computers and digital entertainment
platforms. NVIDIA provides a "top-to-bottom" family of
performance 3D graphics processors and graphics processing units
that, in the company's opinion, has set the standard for
performance, quality and features for a broad range of desktop
PCs.
NVDA popped right back up to the $87 level early Friday morning
before pulling back throughout the remainder of the session. The
stock's resurgence Friday was encouraging, and it was in
accordance with the strength in the Semiconductor Sector (SOX.X).
But we're beginning to notice that NVDA is tracing a set of lower
highs and lower lows. It may very well turn out that NVDA's
pop up to the $87 level Friday marked yet another relative high
and the stock is ready to rollover. We lay this on the table
only so that traders with open positions in the play use strict
risk management strategies. On the other hand, an advance above
the $87 level would break NVDS's string of lower highs, so it
may be best to wait for a breakout above that level before
entering any new positions on strength. The other strategy, of
course, is to enter new call plays on weakness from current
levels. Support currently lies at the $83.75 level, and lower
around $82. Bullish traders can use a bounce from either level
to gain entry into new plays; entering on weakness from current
levels would allow for easier risk measurement and management.
Continue monitoring the SOX when gaming this play, in addition
to MSFT and its upcoming XBox release.
BUY CALL SEP-80 RVU-IP OI=1428 at $ 8.90 SL=6.00
BUY CALL SEP-85*RVU-IQ OI=1912 at $ 5.70 SL=3.50
BUY CALL SEP-90 RVU-IR OI=2959 at $ 3.30 SL=1.75
BUY CALL DEC-90 RVU-LR OI= 337 at $12.30 SL=9.00
BUY CALL DEC-95 RVU-LS OI= 341 at $10.20 SL=7.50
Average Daily Volume = 4.60 mln
CNXT - Conexant Systems $11.61 (+1.68 last week)
Conexant provides semiconductor products and system solutions for
a wide variety of communications electronics. Conexant delivers
semiconductor integrated circuit products and system-level
solutions for a broad range of communications applications. These
products facilitate communications worldwide through wireline voice
and data communications networks, cordless and cellular wireless
telephony systems.
WOW! CNXT's advance up to the $12 level came a little earlier
than we had expected. The stock continues to out perform both
the Nasdaq Composite (COMPX) and the Philly Semi Index (SOX.X) on
up and down days. That being the case, the stock should continue
to perform exceptionally well IF the SOX and COMPX rally into
next week's trading. Bullish, momentum traders can use any
future advance above the $12 level to gain new entry into call
positions. But be warned that the stock's next major level of
resistance lies at the $12.50 level, which doesn't give much room
for mistakes from current levels. Therefore, we maintain that
"better" entries will come on weakness from current levels. If
the stock's pattern of higher lows is going to continue, buyers
should emerge between $10 and $11 on any future weakness. A
bounce in between that range could offer a favorable entry for
new positions, as long as light volume accompanies any weakness.
To switch gears, those traders who picked up some cheap calls
last week should definitely be thinking about booking some
gains around current levels; after all, the SEP 10's doubled
last week. An advance up to $12.50 would offer a solid exit
point early next week for those in at lower prices. For the
longer term, above $12.50, there's not much congestion until
the $14 level. So be patient for a good entry point, as CNXT
could continue working for some time to come. Insofar as its
options are concerned, we continue to prefer the higher delta
contracts not only because they're more sensitive to the
movement in the underlying, but because they're also still
pretty cheap.
BUY CALL SEP- 7.5 QXN-IZ OI= 66 at $4.30 SL=1.75
BUY CALL SEP-10.0*QXN-IB OI=6104 at $2.10 SL=0.50
BUY CALL OCT-10.0 QXN-JB OI=8929 at $2.55 SL=0.75
BUY CALL OCT-12.5 QXN-JV OI=1510 at $1.20 SL=0.25
Average Daily Volume = 3.13 mln
BGEN - Biogen, Inc. $60.79 (+3.01 last week)
Biogen is a biopharmaceutical company primarily engaged in the
business of developing, manufacturing and marketing drugs for
human healthcare. BGEN currently derives revenues from sales
of its Avonex product for the treatment of relapsing forms of
multiple sclerosis and from royalties on worldwide sales by
the company's licensees of a number of other patented products.
Other products include certain forms of alpha interferon,
hepatitis B vaccines and hepatitis B diagnostic test kits. In
order to maintain its leadership role in the industry, BGEN
continues to have an active research and development program.
After dipping to kiss the ascending trendline Wednesday morning,
BGEN vaulted higher on the back of renewed strength in the
Biotechnology index (BTK.X). While the bulls and bears fought
to a stalemate on Thursday, the bulls finally chased off the
bears and the stock charged through the 200-dma, resting just
above the $60 support level (previous resistance). The BTK
likewise scaled resistance near $542 and the real test will
come next week when we see if the bulls can successfully defend
their newfound support. Stochastics are now entering overbought
territory, so the compulsion to take profits will start to
become stronger in the days ahead. We're raising our stop to
$58, and would use any intraday dip (especially on low volume)
to initiate new positions as the stock bounces. A bounce from
$60 would make us feel better though as it would start to build
some confidence that it could act as support going forward.
Keep an eye on the BTK index, as we'll likely need to see
continued strength there, if BGEN is going to continue its
winning ways.
BUY CALL SEP-60*BGQ-IL OI=1975 at $3.30 SL=1.75
BUY CALL SEP-65 BGQ-IM OI=1014 at $1.15 SL=0.50
BUY CALL OCT-60 BGQ-JL OI=3556 at $4.80 SL=3.00
BUY CALL OCT-65 BGQ-JM OI=5284 at $2.60 SL=1.25
BUY CALL OCT-70 BGQ-JN OI=4449 at $1.35 SL=0.75
SELL PUT SEP-55 BGQ-UL OI= 376 at $2.20 SL=3.75
(See risks of selling puts in play legend)
Average Daily Volume = 2.84 mln
LH - Laboratory Corp. of America $84.85 (+3.20 last week)
Laboratory Corporation of America Holdings (LabCorp) is the #2
clinical laboratory service in the world, behind Quest
Diagnostics. LH performs 2000 types of tests for more than
100,000 clients, including health care providers, pharmaceutical
firms, physicians, government agencies and employers. With 25
major laboratories and some 1200 service sites nationwide, the
company emphasizes specialty and niche testing such as allergy
tests, HIV tests, blood analyses, and substance abuse
screenings.
Predictable as the sunrise, LH just marched up the charts this
week in defiance of the choppy market action. What really got
our attention though was the push through the 20-dma (then at
$83.63) on Thursday, followed by a move through the $84
resistance level and the 30-dma ($84.41) on Friday.
Unfortunately, there is a chink in the armor, as volume fell
off on Friday, only hitting about 60% of the ADV. Daily
Stochastics are just entering overbought, and with volume
weakening, we could see some profit taking in the days ahead.
That should simply provide fresh entry opportunities, perhaps
with a bounce from the $82 support level or our $81 stop.
Strong buying volume that pushes LH higher from here can be
used to initiate momentum-based positions on a volume-backed
move through $87, but keep a tight reign on the play if profit
takers appear.
BUY CALL SEP-80 LH-IP OI=130 at $6.90 SL=4.00
BUY CALL SEP-85*LH-IQ OI=508 at $3.80 SL=2.25
BUY CALL SEP-90 LH-IR OI=563 at $1.80 SL=1.00
BUY CALL NOV-85 LH-KQ OI=115 at $7.50 SL=5.25
BUY CALL NOV-90 LH-KR OI=116 at $5.30 SL=3.25
BUY CALL NOV-95 LH-KS OI= 13 at $3.60 SL=1.75
SELL PUT SEP-80 LH-UP OI=743 at $1.50 SL=3.00
(See risks of selling puts in play legend)
Average Daily Volume = 542 K
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**********
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The Option Investor Newsletter Sunday 08-26-2001
Sunday 4 of 5
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charts and graphs, click here:
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MR. STOCK: Your Expert Guide to the Dynamic World of Options
Trading Options aren't easy. We know. That's why, with over
20 years of trading experience, we've designed a website
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*****************************************************************
*************
NEW PUT PLAYS
*************
IMPH - IMPATH $43.78 (-2.23 last week)
IMPATH Inc. focuses on the clinical application of advanced
technologies in the community-based hospital environment to
enable clinicians to make better treatment decisions for their
cancer patients. The Company expanded its focus to harness the
information it was generating from performing analyses on
thousands of cancer specimens annually, and to broaden the value
applications of that biological information. The Company has also
completed multiple strategic acquisitions that have provided
technologies; complementary cancer information including
longitudinal treatment and outcomes data; pharmacoeconomic
analytical capabilities, and a tissue and serology archive of
well-characterized, fully documented cancer specimens.
Just last week, IMPH graced the OI call list. So its segue to the
put list this weekend is quick indeed. But we think it's for good
reason. Late last week, specifically Thursday and Friday, the
biotech sector staged a magnificent rally. The AMEX Biotechnology
Sector Index (BTK.X) sharply advanced back above the 500 level and
continued all the way up to 550 through Friday's session.
Meanwhile, IMPH did nothing but go lower. The stock did try to
participate with its brethren in the biotech sector, but each time
it attempted to rally it was knocked down by overhead supply. Its
drastic and blatant under performance late last week could very
well portend measurable weakness early next week on any pullback
in the biotech sector. Once the demand dries up from the broader
sector, there won't be anything left to prop IMPH up and the
stock should fall if the sellers return next week, who drove it
lower late last week. In terms of entry points, a breakdown below
the $43.50 level in conjunction with weakness in the broader
biotech sector would allow for a solid momentum-based entry point
into the play. In addition, rollovers in the vicinity of the $45
level should offer solid entry points. In both cases, make sure
to confirm volume accordingly. Namely, look for heavy volume on
any breakdown and weak volume on any rally attempt. We're initally
placing stops at the $47 level.
BUY PUT SEP-45*QPH-UI OI=64 at $3.40 SL=1.75
BUY PUT SEP-40 QPH-UH OI=49 at $1.15 SL=0.50
Average Daily Volume = 219 K
IDPH - IDEC Pharmaceuticals $60.92 (+10.61)
IDEC Pharmaceuticals Corporation is a biopharmaceutical company
engaged primarily in the research, development and
commercialization of targeted therapies for the treatment of
cancer and autoimmune and inflammatory diseases. The company's
first commercial product, Rituxan, and its most advanced product
candidate, ZEVALIN (ibritumomab tiuxetan), are for use or
intended for use in the treatment of certain B-cell non-Hodgkin's
lymphomas (B-cell NHLs). B-cell NHLs currently afflict
approximately 300,000 patients in the United States.
Some may question our reasoning behind this play. But it's
quite simple. We're speculating that IDPH is due for a pullback
early next week. After all, the stock climbed over 20 percent
in the space of one week. Although, we concede that this play
is most aggressive, and only those traders with the risk
tolerance for such a play should consider trading IDPH to the
downside early next week. Nevertheless, the stock is well into
overbought territory and due for a profit taking pullback,
which could be substantial. The stock is approaching historical
resistance around the $62 level, which may be the site that
traders decide to take profits and IDPH rolls over. Going
into next week's trading, if the stock follows through early in
Monday's session, watch for resistance to materialize around the
$62 level. Above that level, we've set our stop at $65. If
the stock doesn't follow-through over the weekend, look for a
quick drop back below the $60 level. If that occurs, confirm
weakness with any decline below the $58 level. From there,
IDPH should retest its former resistance, which now serves as
support, around the $55 area - that will be our short-term
downside price target if our speculation of a pullback is
correct. Bearish speculators will want to pay special
attention fo the Biotech Sector Index (BTK.X) before trading
IDPH. The 550 level in the BTK has served as resistance in
the past and it may do so again next week.
BUY PUT SEP-60*IHD-UL OI= 26 at $3.80 SL=1.75
BUY PUT SEP-55 IDK-UK OI=404 at $1.90 SL=1.00
Average Daily Volume = 3.64 mln
*****************
CURRENT PUT PLAYS
*****************
CHKP - Check Point Software $33.88 (-2.29 last week)
Check Point Software is the worldwide leader in securing the
Internet. The company's Secure Virtual Network (SVN)
architecture provides the infrastructure that enables secure
and reliable Internet communications.
We knew it was bound to happen, and it did last Friday. After a
stock stages such a significant decline, such as CHKP's over the
last two weeks, it's bound to rebound for the simple sake of
relief. Oftentimes too many shorts get into a stock and the
result is short, sharp covering rallies. That's why we've been
stressing to book gains in this play on the way down! Hopefully
bearish traders with open positions heeded our suggestion and
booked some profits before Friday's rebound. In any case, what's
in the past stays in the past. Looking forward, it's possible
that CHKP continues advancing into next week if enough shorts
get scared out of their positions. However, there's some
meaningful resistance just above at the $35 level, which actually
may end up being a solid entry point for new put plays. What
we'll be watching for is weakness in the Software Sector Index
(GSO.X) in conjunction with CHKP stalling around the $35 level.
Any subsequent rollover from that level should allow for new
entries. Our stop remains in place at the $36 level, and allows
for solid risk management should CHKP advance up to the $35 level
then rollover. If CHKP doesn't make it up to the $35 level,
a breakdown below the $33 support level would also allow for new
directional entries, especially if the GSO and COMPX are pulling
back.
BUY PUT SEP-35*KEQ-UG OI=2421 at $3.70 SL=2.55
BUY PUT SEP-30 KEQ-UF OI=3350 at $1.45 SL=0.75
Average Daily Volume = 10.5 mln
GMST - Gemstar-TV Guide $33.02 (-0.51 last week)
Gemstar-TV Guide is a global media and technology company focused
on developing, licensing and providing products and services that
simplify and enhance consumer entertainment. Many of the company's
products have a special emphasis on television oriented
technologies and services, in particular, program guidance
products including those marketed under the TV Guide name.
The long anticipated short covering rally finally transpired in
GMST last Friday. The stock advanced over 10 percent, far out
pacing the gains in the broader market. That's part of the
reason we know that GMST's advance was due to short covering.
The other metric that lends to the idea that GMST's rally last
Friday was a product of short covering was the weak volume on
which the stock advanced. The stock traded about 3.3 million
shares, compared with last Thursday's trading activity of 5.5
million shares. One might be able to intelligently speculate
that there are still more sellers in GMST than there are buyers.
For that reason, we're maintaining coverage on GMST over the
weekend and looking for weakness to remerge early next week.
Bearish traders looking for a rollover can turn to GMST's
short-term descending trend line, which is currently reinforced
by the 10-dma, which lies at $33.98. A rollover from that
level should offer a solid entry point into new plays. If
GMST doesn't continued advancing into next week's trading, then
a breakdown below the $30 level would confirm that the sellers
have returned en masse. Should GMST rollover next week and
the sellers in fact regain control over the stock, our short-
term price target to the downside is around the $25 level, which
should offer a favorable exit point for those looking for new
entries in addition to those with open positions. But if the
stock shows any further signs of strength early next week, we'll
drop coverage on the play.
BUY PUT SEP-40 QLF-UH OI=1601 at $7.90 SL=5.75
BUY PUT SEP-35*QLF-UG OI=1916 at $4.20 SL=2.75
Average Daily Volume = 3.70 mln
EBAY - eBay $59.01 (+0.01 last week)
eBay is a United States dynamic pricing online trading platform.
eBay developed a Web based community in which buyers and
sellers are brought together in an efficient format to buy and
sell items, such as collectibles, automobiles, high-end or
premium art items, jewelry, consumer electronics and a host of
practical and miscellaneous items.
EBAY's proving that it's not going to be an easy stock to play.
Its gyrations are growing increasingly wild, and the volatility
in the play is leading to whipsaws left and right. Because of
its wild price action, EBAY demands precision from those who
are attempting to trade the stock. And by precision, traders
need to have a sound strategy in place and an ability to
accurately measure and manage risk. With that said, perhaps
the best way to manage risk in this stock is to enter new put
plays close to meaningful resistance levels. That way, if EBAY
rallies it's an quick stop loss to minimize losses. Last
Friday's sharp rally may have set the stock up for another
big leg lower and allow for traders to gain the precise entry
points we alluded to. Significant resistance exists at the $60
level, which may offer a precise entry point. But if EBAY
gets above that level, it may be able to advance all the way
up to $62 before encountering congestion again. The $62 may
also provide a solid entry point during any intraday rally
attempt up to that level. When gaming the stock, make sure to
check on the Internet Sector Index (INX.X). Although other
stocks within the group continue to flounder, it should
serve traders well to search out sector confirmation. Along
with its sector, keep close tabs on the COMPX.
BUY PUT SEP-60*QXB-UL OI=5289 at $4.30 SL=3.50
BUY PUT SEP-55 QXB-UK OI=3447 at $2.15 SL=1.25
Average Daily Volume = 5.70 mln
AIG - American International Grp. $77.20 (-2.01 last week)
Engaged in a broad range of insurance and insurance-related
activities through its subsidiaries, AIG's primary focus is on
its general and life insurance businesses. Additionally, the
company is growing its presence in financial services and asset
management. Other operations include auto insurance, mortgage
guaranty, annuities, and aircraft leasing. With operations in
130 countries, AIG generates more than half of its revenues
outside the United States.
"I've fallen, and I can't get up." That ad slogan would seem
a proper one for shares of AIG, which haven't seen a decent
day since August 15th. The daily fast Stochastics are about
the deepest in oversold that I've ever seen, currently resting
at 0.81. That's buried deep, when you consider they can't go
below zero! I'd be on the lookout for an oversold bounce, if
I were you. There's no reason to panic just yet, but start
thinking about taking some profits, especially if you've been
in the play since the $81-82 level. The downside is likely
limited to the $74-75 level, so decide how far you want to
push it. The first danger sign (for bears) is the fact that
the Insurance index (IUX.X) is starting to firm up near
$715-720. Since AIG tracks the IUX very well, a strong sector
move will almost certainly spill over and give AIG a bounce
too. We're keeping our stop at $79, and a failed rally near
that level is really the only situation that would have us
contemplating new positions right now.
BUY PUT SEP-80*AIG-UP OI= 6243 at $3.90 SL=2.50
BUY PUT SEP-75 AIG-UO OI=16488 at $1.30 SL=0.75
Average Daily Volume = 4.68 mln
QLGC - QLogic Corporation $34.32 (-1.18 last week)
Somebody has to make the equipment that lets your computer talk
to all its peripheral equipment, and QLGC does it well. A
leading designer and supplier of semiconductor and board-level
input/output (I/O) management products, QLGC has been providing
SCSI-based connectivity solutions to this market sector for over
12 years. QLGC's I/O products provide a high performance
interface between computer systems and their attached data
storage peripherals, such as hard disk and tape drives,
removable disk drives and RAID (redundant array of independent
disks) subsystems. The company is also the market share leader
in Fibre Channel host bus adapters, a market segment that is
receiving tremendous attention from investors.
Helped along by positive comments from CSCO and positive news
for MSFT, the Technology sector got its oversold bounce on
Friday, propelling QCLC higher in the process. While volume
was robust, at over 10 million shares, bullish traders should
keep their horns tucked in a bit longer. The stock has some
formidable resistance overhead, first near the 62% retracement
of the spring gains ($35) and then historical resistance
(prior support) just below $36. Should traders push the stock
up to one of these levels before allowing it to roll over, it
could provide attractive entries for hungry bears. And without
the short-covering frenzy we saw on Friday, it's going to be
difficult to propel the stock higher. Continued weakness could
materialize just as easily, and a drop back under $33 could
provide for fresh entries as well. The lows from last week mean
that we will have another battle between the bulls and the bears
near the $30 support level when we get there, so that might be
a good time to consider locking in profits or at least
tightening up your stop. For now, keep stops at $36.
BUY PUT SEP-35*QLC-UG OI=1197 at $4.40 SL=2.75
BUY PUT SEP-30 QLC-UF OI=7546 at $2.20 SL=1.00
Average Daily Volume = 7.02 mln
SEBL - Siebel Systems $23.53 (-1.93 last week)
Siebel Systems is a provider of eBusiness applications. The
company's products enable organizations to sell to, market to,
and service their customers across multiple channels, including
the Web, call centers, resellers, retail, and dealer networks.
SEBL's eBusiness applications are available in
industry-specific versions designed for the pharmaceutical,
healthcare, telecommunications, insurance, energy, apparel,
automotive, and finance markets. Through SEBL's applications,
companies can create a single source of customer information
that sales, service, and marketing professionals can use to
tailor product and service offerings to meet each of their
customer's unique needs.
Software stocks got an infusion of Bullish sentiment on Friday
after positive news came out from MSFT, launching the Software
index (GSO.X) off the $160 support level for more than a 6% gain
on the day. SEBL was due for an oversold bounce, and that's
exactly what it got. But the stock has got its work cut out for
it if it is going to break out of its persistent months-long
downtrend. Down again next week, seems the more likely course
and we'll be lying in wait when buyers start to dry up.
Intraday resistance at $24 could provide for fresh entries on a
failed rally, but the better target would be a rollover from the
$25-26 level, the site of stronger resistance. Now that the
buying pressure has been relieved to some extent, SEBL should
be free to drop back down in pursuit of new yearly lows. When
it does, we'll get more entry opportunities on the downside as
well. Target new positions on a drop below $22, and then keep
an eye out for a weak bounce near the $20.50 support level. If
the bulls can't rally SEBL from that level, at test of $19 would
appear to be in order.
BUY PUT SEP-25.0*SGQ-UE OI=6148 at $3.00 SL=1.50
BUY PUT SEP-22.5 SGQ-UX OI=3823 at $1.70 SL=0.75
BUY PUT SEP-20.0 SGQ-UD OI=1216 at $0.90 SL=0.00
Average Daily Volume = 14.4 mln
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*****
LEAPS
*****
Anybody Want to Step Up and Call That a Market Bottom?
By Mark Phillips
Contact Support
I didn't think so. I can't restrain myself any longer and need
to make a few comments about the market as a whole. And I think
it makes good sense to focus some of my commentary there this
week, due to the fact that our Portfolio took a position in the
NASDAQ-100 Trust (AMEX:QQQ) on the mid-week weakness. Despite
the fact that we saw a nice solid rally Friday morning, I really
don't have a lot of confidence that this is anything more than a
short-covering rally. So why did we enter the QQQ play, you
ask? Discipline. We set the criteria for the play and when
those criteria are satisfied, the LEAPS Portfolio has no choice
but to take the position. Of course, we need to be just as
disciplined on the exit side of the play as well. If we have
done our due diligence and arrived at a logical conclusion (in
the absence of the noise from CNBC), we should be able to apply
those rational decisions and trade profitably, even in this
trying market.
That is a big part of what we have tried to accomplish with the
LEAPS column, is give you a roadmap on the weekend. That way,
you will know in advance of the following week's column what
plays we will have taken a position in, and which ones are
headed for the drop list. You should be able to look at the
Portfolio and Watch List from last weekend and after spending
10 minutes scanning charts, see that we would drop International
Business Machines (NYSE:IBM), Sprint Corp. (NYSE:FON) and
Washington Mutual (NYSE:WM) based on our violated stops.
Additionally, the observant reader could look at the Watch List
and see that we would have taken a position in the QQQ on
Wednesday and Oracle Corporation (NASDAQ:ORCL) on Friday.
But I digress. Back to the markets. Remember all the chatter
about the 1935 support level on the NASDAQ Composite
(INDEX:COMPX)? Did you notice that even with a 4% rally on the
heels of positive comments from Cisco Systems (NASDAQ:CSCO)
Thursday night, that the COMPX still came to rest under that
level? Volume was not particularly strong either, coming in
at less than 1.5 billion shares. You know my biases regarding
the NASDAQ, so let's see what happened on the Dow Jones
Industrials (INDEX:INDU). Nearly a 200 point advance, and that
just brings the "old-economy" index into the middle of its
recent 10,200-10,600 range. Volume? Barely over a billion
shares...not bad, but certainly not the beginning of a strong
move, either.
Underlying market sentiment is really the key to my skeptical
attitude. I've been watching the Volatility Index more than
usual lately, because it really isn't acting the way it should
in a market that is getting ready to post a sustained advance.
Up days in the market give us sharp drops in the VIX (indicating
a sharp increase in call buying vs. put buying), while market
declines give us reluctant, and small increases in the VIX. I
see a market (take your pick) that is still in trouble, but
there is no fear, as measured by the VIX. That is not the sort
of condition that will lead to sustained rallies. Investor's
Intelligence's most recent survey shows 47% of investors lined
up in the Bullish camp, with only 32% feeling Bearish. No wall
of worry for investors to climb there. Case in point, the VIX
dropped precipitously on Friday, losing 10.5% and closing at
22.29, it's lowest level since July 3rd.
I want to see the markets post a sustained advance, but I don't
believe it will start from these conditions. Economic weakness
hasn't magically vaporized with CSCO CEO John Chambers uttering
the phrase "signs of stabilization", there is not nearly enough
fear in the current market to support a real advance, and we
are still in August...you know, the summer doldrums. Oh one
other thing. An analyst on CNBC on Friday pointed out that the
stocks seeing the most "buying" interest during the "rally" were
those stocks that had the heaviest short interest.
Hmmmmm...short-covering, anyone? Ok, I feel better, now!
We got an early payoff for our more aggressive stop loss
approach this week, as WM fell apart in the wake of the comments
from the Federal Reserve that indicated we are nearing the end
of the current interest rate cutting cycle. Due to our tight
stop, we got taken out of the play on Monday, before WM
proceeded to give up nearly 10% on the week. I was pleased to
see our stop triggered on Monday, and positively overjoyed to
see the carnage we avoided over the past few days. Our
Portfolio exit came with an 89% profit, which would have been
cut to just over 40% by Friday's close. What do you know?
Money management does work. And I still think there are profits
to be wrung out of WM, but we need to see if we can scoop up an
attractive entry point in the weeks ahead, as sentiment in that
sector runs its course to the downside. I'll keep my eye on it
and let you know if things start to look attractive.
Our tightened stops axed the FON and International IBM plays,
both for a small loss, but I'm actually pleased that we can
close the book on those plays. FON has been a serious
disappointment, never really advancing into positive territory
since we moved it into our Portfolio back in early April. In
retrospect, we shouldn't have been chasing profits in the
long-distance phone market. We're taking a different approach
this week, with our new Watch List play on Sprint PCS Group
(NYSE:PCS), targeting renewed growth in the Wireless sector.
As we have continued to whittle down the Portfolio, it is
interesting to note that aside from the new plays this week,
there is only one Technology stock listed, and it is currently
the worst performer of the bunch. See why we are trying to
branch out into the Drugs, Consumer, Precious Metals, and
Energy stocks? With the removal of WM from the Portfolio this
weekend, Barrick Gold (NYSE:ABX) is currently the biggest winner
on the list. That's right, a Gold stock! Hard to believe,
isn't it. Note that we have tightened up the stop of the play
to preserve our profits in the event of any serious profit
taking. Philip Morris (NYSE:MO) is trying to break out here, so
we have raised our stop to $43, our entry point into the play.
While it won't guarantee a profit, it will certainly keep any
loss small if the bears come back to town. And did you notice
how Merck (NYSE:MRK) held above our $68 stop this week, even
after the potentially devastating Vioxx news on Thursday?
Investors seem to have shrugged that off and were buying MRK
again on Friday. If they keep this up, we'll be raising that
stop up over the $70 level next weekend.
Finally, I have a couple quick items related to the Watch List.
Just when it seemed a sure thing that we would get Calpine
(NYSE:CPN) for an absolute steal, the company came out and made
positive comments (which investors actually believed) regarding
future expansion plans. The stock popped up sharply and spent
the rest of the week in rally mode, much to my chagrin. The
good news is that it looks like the $28-29 level will hold as
support, so we have raised our entry target accordingly.
Speaking of raising targets, I decided to nudge the one for Eli
Lilly a bit higher. The Pharmaceutical index (DRG.X) is once
again pressuring the $400 resistance level, and it is looking
increasingly unlikely that LLY will satisfy our entry target in
the near term. In fact, with weekly Stochastics nearing
overbought territory, we may have to wait awhile. I've raised
the entry target to $75-76, but I don't expect that we'll get
an entry into the play until we see the weekly Stochastics
retrace back into the oversold region.
To recap, it was nice to see a solid positive day in the broad
markets on Friday, but I remain unconvinced. You don't need to
follow the exact game plan we use here in the LEAPS column, but
hopefully you can see that you need a disciplined approach if
you (and your trading account) are going to survive in these
continually trying times.
Stick to the plan, and have a great week!
Mark Phillips
Contact Support
LEAPS Portfolio
Current Open Plays
SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP
CLX 03/13/01 '03 $ 35 VUT-AG $ 6.10 $ 7.30 19.67% $36.50
VRSN 06/12/01 '03 $ 60 OVX-AL $20.40 $13.90 -31.86% $ 42
MRK 07/09/01 '03 $ 70 VMK-AN $ 7.40 $ 9.10 22.97% $ 68
MO 07/30/01 '03 $ 45 VPM-AI $ 6.10 $ 7.50 22.95% $ 43
ABX 08/06/01 '03 $ 15 VBX-AC $ 2.75 $ 4.00 45.45% $16.50
'04 $ 15 LBX-AC $ 3.70 $ 5.00 35.14% $16.50
GLM 08/15/01 '03 $ 20 OML-AD $ 3.30 $ 2.90 -12.12% $ 14
'04 $ 20 KLW-AD $ 4.70 $ 4.00 -14.89% $ 14
ORCL 08/24/01 '03 $ 15 VOC-AC $ 4.60 $ 4.60 0.00% $ 13
'04 $ 15 LRO-AC $ 5.90 $ 5.90 0.00% $ 13
QQQ 08/22/01 '03 $ 40 VZQ-AN $ 7.00 $ 7.90 12.86% $ 36
'04 $ 40 LRI-AN $ 9.30 $10.60 13.98% $ 36
LEAPS Watchlist
Current Possibles
SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL
CPN 07/08/01 $29-30 JAN-2003 $ 30 OLB-AF
CC JAN-2003 $ 25 OLB-AE
JAN-2004 $ 30 LZC-AF
CC JAN-2004 $ 30 LZC-AF
ENE 07/29/01 $34-35 JAN-2003 $ 35 VEN-AG
CC JAN-2003 $ 35 VEN-AG
JAN-2004 $ 40 LYN-AH
CC JAN-2004 $ 30 LYN-AF
LLY 08/05/01 $75-76 JAN-2003 $ 75 VIL-AO
CC JAN-2003 $ 70 VIL-AN
JAN-2004 $ 80 LZE-AP
CC JAN-2004 $ 70 LZE-AN
GE 08/12/01 $38-39 JAN-2003 $ 40 VGE-AH
CC JAN-2003 $ 30 VGE-AF
JAN-2004 $ 40 LGR-AH
CC JAN-2004 $ 30 LGR-AF
DIS 08/26/01 $24-24.50 JAN-2003 $ 30 VDS-AF
CC JAN-2003 $ 25 VDS-AE
JAN-2004 $ 30 LWD-AF
CC JAN-2004 $ 25 LWD-AE
PCS 08/26/01 $21-22 JAN-2003 $ 25 VVH-AE
CC JAN-2003 $ 20 VVH-AD
JAN-2004 $ 25 LVH-AE
CC JAN-2004 $ 20 LVH-AD
New Portfolio Plays
ORCL - Oracle Corporation $15.19
The positive comments from CSCO after the close on Thursday was
the primary catalyst to the rise in Technology stocks, and we
need to see some serious volume and follow-through to convince
us that there is any staying power. But ORCL gave us exactly
the entry we were looking for. After closing on Thursday at
$14.01, the stock advanced steadily throughout the day on
Friday. Dipping as low as $14.11, ORCL managed to crest the $15
level and close just fractionally below the high of the day. We
saw renewed life throughout the Software sector as well, with
the GSO index vaulting higher from the $160 support level. I
want to believe this is the bottom for the stock, with weekly
Stochastics bottoming in oversold, but there is now some
significant overhead resistance to battle through. First we
have $16, then $17.25, before ORCL can start whittling away at
the $18-20 level. We'll start with our stop at $13, just below
the April lows, but we'll aggressively advance that stop as the
stock advances.
BUY LEAP JAN-2003 $15.00 VOC-AC $4.60
BUY LEAP JAN-2004 $15.00 LRO-AC $5.90
QQQ - NASDAQ-100 Trust $37.69
There's no doubt that we are trying to pick a bottom on the
NASDAQ with our QQQ play, and with that type of trading approach
comes inherently greater risk. The dip to 1817 on the NASDAQ
Composite on Wednesday definitely had me nervous as the
afternoon recovery gave me no choice but to take a position,
based on our $37 entry target. It was encouraging to see the
recovery from the lows, but Thursday's weakness had me chewing
my fingernails down to the quick. Fortunately, CSCO rode in on
its white horse Thursday night, giving a lift to the Technology
sector and raising the QQQ above the $39 level. While I'm
hoping that we have gotten a good long-term entry, I'll be
keeping a sharp eye on the weekly Stochastics until it turns up
out of oversold territory. So I like the entry we got, but I
continue to be concerned about the weakness of the U.S. and
global economies, not to mention the light volume in this brief
recovery. Until we get SOLID signs of the techonomy bottoming,
the NASDAQ will have a hard time staging a solid advance, which
is why I view our QQQ play as speculative. Feel free to take
entries on renewed dips to the $37 level, but keep a tight stop
in place. For our Portfolio, it will start at $36. If the QQQ
clears $41 next week, I would recommend cinching those stops up
to $38 or even $40, to guarantee we don't lose money on a market
pullback.
BUY LEAP JAN-2003 $40.00 VZQ-AN $7.00
BUY LEAP JAN-2004 $40.00 LRI-AN $9.30
New Watchlist Plays
DIS - The Walt Disney Company $26.65
In our continuing effort to fill the Watch List (and eventually
the Portfolio) with a nicely diversified selection, DIS makes it
onto the list. I have to admit to a bit of coercion on this
one, as my fiancÚ is a HUGE Disney fan. While she hasn't been
leaning on me to add it to the Watch List, she does frequently
ask me how the stock is doing. So I've been watching the
entertainment conglomerate a little more closely than I have in
the past. What caught my attention was the VERY long-term
chart, which shows a very mild upward trend created by the lows
in October 1998 and October 1999. Due to the recent market
weakness, the stock is approaching the level of this trend
(support) line, which currently rests near $24.50. Weekly
Stochastics are still heading south, so we aren't in a hurry
here. But when both the daily and weekly stochastics begin to
recover from oversold, we ought to see the stock rebound from
the $24-24.50 level. We'll target new entries at that level in
the weeks ahead. One interesting point about the 1998/1999 lows
is the fact that there were several tests of support before the
stock began to recover. That seems to indicate that we won't
need to be in a hurry, as there will be ample opportunity to
gain entry into the play before the recovery begins into the end
of the year.
BUY LEAP JAN-2003 $30.00 VDS-AF
BUY LEAP JAN-2003 $25.00 VDS-AE For Covered Call
BUY LEAP JAN-2004 $30.00 LWD-AF
BUY LEAP JAN-2004 $25.00 LWD-AE For Covered Call
PCS - Sprint PCS Group $24.84
It may seem strange to add PCS to the Watch List in the same
week that we finally gave the laggard FON play the boot, but
the similarity in the two companies' business ends with the
name. FON is involved in the cutthroat long-distance business,
while PCS is a leading Wireless Communication provider. While
it is hard to quantify right now, it seems that a bottom is
being put in place in the Wireless sector, and if that's true,
then we can see the beginning effects of that in the weekly PCS
chart. The stock has been posting higher lows since April and
the ascending trendline is currently resting near $21. While
the weekly Stochastics is still heading down, the recovery this
week is helping it to slow its descent. As a matter of fact, it
looks like it might fail to enter the oversold region on this
cycle. The daily is nearing overbought territory, so we're
going to look for an entry with the next drop into oversold in
this timeframe. I would expect that to coincide with price
dropping back into the $21-22 area and that will be our entry
target. We can follow this with a fairly tight $20 stop,
helping to keep our risk in the play well controlled.
BUY LEAP JAN-2003 $25.00 VVH-AE
BUY LEAP JAN-2003 $20.00 VVH-AD For Covered Call
BUY LEAP JAN-2004 $25.00 LVH-AE
BUY LEAP JAN-2004 $20.00 LVH-AD For Covered Call
Drops
WM $41.90 Now that is precisely what I've been worried about!
With the Fed nearing the end of its interest rate cutting cycle,
investors have jumped out of shares of the nation's leading
thrifts, and WM plunged through several levels of support in the
past couple days, coming to rest near the long-term ascending
trendline on Friday. With our aggressively tightened stop, we
were taken out of the play on Monday with an almost 90% gain on
our LEAP. We'll keep an eye on WM for another play in the
future, but for now we are happy to book the gain and move on.
FON $22.16 Ever since we added it to the Portfolio in April,
FON has been a laggard play, so I primarily tightened the stop
in order to get us out of the play and allow us to focus on
other candidates with better upside potential. Sure enough, the
dip on Wednesday pushed FON below the $22.50 level and got us
out of the play. The disappointment of this play has been the
collapse in LEAPS premium since our entry as volatility has
continued to decline. While LEAPS premiums are less susceptible
to volatility levels, we can see the negative effect they can
have when the underlying stock fails to advance appreciably.
IBM $101.89 While the argument could be made that we got too
aggressive with our stop on IBM, given the sharp rebound in the
share price on Friday as the broad markets rallied on the MSFT
and CSCO news, the picture looked decidedly bearish earlier in
the week. After 7 weeks in the Portfolio, the stock had gone
absolutely nowhere. Tuesday's close below our $102 stop forced
us to close the play for a moderate loss, and while it was
frustrating to watch the rebound proceed without us, following
our discipline is the right thing to do. Given IBM's action in
recent weeks, and the continuing economic weakness (despite
Friday's strong housing report), there are better places for
our money right now.
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The Option Investor Newsletter Sunday 08-26-2001
Sunday 5 of 5
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*************
COVERED CALLS
*************
Trading Terms: "Undeclared" Short-Selling
By Mark Wnetrzak
Most traders understand the basic characteristics of selling a
stock "short" and the requirements for participating in that
strategy but it is also important to be aware of a common tactic
that has given short-sellers such a bad reputation. While the
technique is often maligned, short-selling occupies a necessary
place in the equity markets. The recent slump in technology
shares and the incredible amount of short interest in stocks has
presented us with a great opportunity to reprint this popular
article.
As you know, short-selling is simply an attempt to profit from
a decline in the price of stock. An investor sells stock that
is borrowed. If the stock falls below the original sale price,
it is repurchased and returned to the broker as a replacement for
the stock that was originally borrowed. The difference between
the sale price and the purchase price is profit.
Short-selling can be divided into two categories, declared and
undeclared. Declared short-selling is a common trading strategy
that is used in the market regularly by institutional investors,
fund managers and professional speculators. Because the basis for
short-selling is borrowed stock, declared short positions risk
being squeezed. Recall that a short-seller usually provides 50%
of the value of the stock in a margin account. If the share price
increases, the short-seller will be forced to increase his margin
collateral in order to maintain the short position. If the issue
continues higher, the seller may elect to repurchase the stock
instead of adding to his margin requirement. This contributes to
the (natural) upward movement of the stock by increasing demand,
thus driving the price higher.
Undeclared short-selling is a destructive and unwelcome practice
that leverages enormous negative pressure on a stock. The method
consists of creating stock that doesn't exist to sell many times
over. The stock isn't borrowed; it is actually fictitious stock
that is sold short. This nonexistent stock increases a company's
float and makes it very difficult for the stock price to increase
in value. The shorts-sellers make a profit at great cost to the
companies involved. The iniquitous technique adds massive costs
to maintaining a market in a stock and it also reduces a company's
business options. It can drive the price of a stock to artificial
lows where eventual shareholder lawsuits can ruin the company's
future. In the past, complaints to regulatory agencies haven't
stopped the practice of undeclared short-selling but one way a
company can protect their stock is to recommend that shareholders
take physical delivery of the stock certificates. When delivery
of an issue is demanded by a significant number of investors, the
originators of non-existent stock can be legally "squeezed" and
when the short-sellers don't have the stock to deliver, they are
forced to buy it in the open market. In addition, stock owners
should communicate any knowledge of this unwanted practice to the
company's other shareholders because when this type of activity
becomes public information, unscrupulous traders will ply their
ruinous techniques elsewhere.
Good Luck!
SUMMARY OF PREVIOUS CANDIDATES
*****
Note: Margin not used in calculations.
Stock Price Last Call Strike Price Gain Potential
Symbol Picked Price Month Sold Picked /Loss Mon. Yield
CCRD 10.20 10.00 SEP 10.00 1.15 $ 0.95 9.1%
HLIT 16.04 15.54 SEP 15.00 2.20 *$ 1.16 6.1%
ARTC 31.67 30.28 SEP 30.00 3.50 *$ 1.83 5.6%
ISSI 15.00 16.08 SEP 15.00 1.25 *$ 1.25 5.6%
FFIV 14.59 16.76 SEP 12.50 2.85 *$ 0.76 5.6%
NTIQ 38.60 35.39 SEP 35.00 6.50 *$ 2.90 5.6%
PMCS 34.40 34.67 SEP 30.00 6.50 *$ 2.10 5.5%
SPCT 15.85 16.10 SEP 15.00 2.05 *$ 1.20 5.4%
CCUR 11.60 11.70 SEP 10.00 2.15 *$ 0.55 5.1%
PHTN 39.97 34.86 SEP 35.00 7.70 $ 2.59 5.0%
NETA 16.36 15.52 SEP 15.00 2.45 *$ 1.09 4.9%
PHTN 38.34 34.86 SEP 32.50 7.50 *$ 1.66 4.7%
NMTC 28.87 28.96 SEP 25.00 5.10 *$ 1.23 4.5%
SEAC 23.55 22.55 SEP 20.00 4.70 *$ 1.15 4.4%
NTIQ 36.40 35.39 SEP 30.00 8.10 *$ 1.70 4.4%
DAVX 10.26 9.97 SEP 10.00 0.75 $ 0.46 4.2%
PTEC 15.05 14.57 SEP 15.00 1.20 $ 0.72 3.8%
IGEN 32.28 29.07 SEP 30.00 4.50 $ 1.29 3.4%
APCS 18.36 16.69 SEP 17.50 2.00 $ 0.33 1.5%
*$ = Stock price is above the sold striking price.
Comments:
Wasn't that great! With Friday's rally, the Markets are right
back to where they were two weeks ago. At least for the DOW
and S&P 500, as the tech-heavy NASDAQ didn't fare as well. A
second chance to exit weaker than expected positions? We will
show Seachange International (NASDAQ:SEAC) closed in the name
of capital preservation as the technical bounce offered a very
favorable exit. Harmonic (NASDAQ:HLIT) bounced off its 50-dma
on heavy volume Friday and again confirmed the April - July
trend-line. Netiq Corp. (NASDAQ:NTIQ) is testing both its 30-
and 50-dmas and should be monitored closely. The failure to
remain above its 150-dma is worrisome. Concurrent Computer
(NASDAQ:CCUR) rallied nicely on Friday but the weekly chart
is looking a bit troublesome (3 Hanging Man candlesticks in
a row). Photon Dynamics (NASDAQ:PHTN) took a turn for the
worse on Tuesday this week when it failed to take out the
early August high (no news). Monitor the position closely
as the stock is testing its 50-dma and the May high. IGEN
International (NASDAQ:IGEN) is issuing mixed technical signals
as the stock tests its 30-dma. A move towards $28 and the
March - June trend-line appears likely. Alamosa Holdings
(NASDAQ:APCS) is testing its 50-dma and a strong technical
support area. The position should be monitored closely during
this "key" moment.
NEW CANDIDATES
*********
Sequenced by Company
*****
Stock Last Call Strike Option Last Open Cost Days Target
Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield
ANSR 9.01 SEP 7.50 QRA IU 1.80 486 7.21 28 4.4%
CTIC 31.39 SEP 30.00 CUC IF 3.20 691 28.19 28 7.0%
GSPN 16.24 SEP 15.00 GLQ IC 2.30 2396 13.94 28 8.3%
IART 31.30 SEP 30.00 UJI IF 2.80 106 28.50 28 5.7%
PRIA 17.89 SEP 17.50 UXQ IW 1.55 204 16.34 28 7.7%
VICL 12.96 SEP 12.50 VAQ IV 1.05 15 11.91 28 5.4%
WBSN 19.19 SEP 17.50 DQH IW 2.35 5 16.84 28 4.3%
Sequenced by Target Yield (monthly basis)
*****
Stock Last Call Strike Option Last Open Cost Days Target
Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield
GSPN 16.24 SEP 15.00 GLQ IC 2.30 2396 13.94 28 8.3%
PRIA 17.89 SEP 17.50 UXQ IW 1.55 204 16.34 28 7.7%
CTIC 31.39 SEP 30.00 CUC IF 3.20 691 28.19 28 7.0%
IART 31.30 SEP 30.00 UJI IF 2.80 106 28.50 28 5.7%
VICL 12.96 SEP 12.50 VAQ IV 1.05 15 11.91 28 5.4%
ANSR 9.01 SEP 7.50 QRA IU 1.80 486 7.21 28 4.4%
WBSN 19.19 SEP 17.50 DQH IW 2.35 5 16.84 28 4.3%
Company Descriptions
LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even
point, DE-Days to Expiry, TY-Target Yield (monthly basis).
*****
ANSR - Answerthink $9.01 *** Technicals Only! ***
Answerthink (NASDAQ:ANSR) is a leading provider of technology
enabled business transformation solutions. The company brings
together multi-disciplinary expertise in benchmarking and
research, business transformation, interactive marketing,
business applications and technology integration to serve the
needs of Global 2000 clients. Answerthink's solutions span
all functional areas of a company including finance, human
resources, information technology, sales, marketing, customer
service, and supply chain, as well as across a variety of
industry sectors. Answerthink reported earnings in July that
matched estimates. The CEO said that despite the weak economy
Answerthink outperformed their peer group, increased their cash
position and strengthened their balance sheet. We simply favor
the bullish move above the neckline of a double-bottom formation,
which suggests further upside potential.
SEP 7.50 QRA IU LB=1.80 OI=486 CB=7.21 DE=28 TY=4.4%
*****
CTIC - Cell Therapeutics $31.39 *** Bracing For A Rally! ***
Cell Therapeutics (NASDAQ:CTIC) is a biopharmaceutical company
committed to making cancer a treatable disease by discovering,
developing and bringing to market innovative treatments for cancer.
The company's lead product, called arsenic trioxide, or TRISENOX,
received FDA approval in September 2000. TRISENOX is initially
being marketed for patients with a type of blood cell cancer
called Acute Promyelocytic Leukemia (APL), who have relapsed or
failed available therapies. Recent research suggests that arsenic
trioxide in combination with ascorbic acid may overcome or circum-
vent the major resistance mechanisms found in multiple myeloma
cells. CTIC reported earnings in July that showed 2nd quarter
sales of Trisenox (arsenic trioxide) of $1.9 million. The stock
has been consolidating for six months and the recent rally on
high volume took out the July high. The bullish technicals
suggest that CTIC is ready to challenge resistance near $35.
SEP 30.00 CUC IF LB=3.20 OI=691 CB=28.19 DE=28 TY=7.0%
*****
GSPN - GlobeSpan $16.24 *** Bottom Fishing! ***
GlobeSpan (NASDAQ:GSPN) is a provider of integrated circuits,
software and system designs for digital subscriber line (DSL)
applications which enable high-speed data transmission over
the existing copper telephone lines at rates over 100 times
faster than today's 56 kilobit modem technologies. Both Cahners
In-Stat and Dataquest have ranked GlobeSpan number one in DSL
chipset shipments. GlobeSpan reported earnings at the end of
July which showed that revenues fell 21% in the 2nd quarter
because of order cancellations and, as a result, cut about 10%
of its work force. Investors were hopeful after the company
said it was comfortable with current Wall Street expectations
for the next quarter. We simply favor the buying support near
our cost basis for a speculative entry point in a Stage I stock.
SEP 15.00 GLQ IC LB=2.30 OI=2396 CB=13.94 DE=28 TY=8.3%
*****
IART - Integra LifeSciences $31.30 *** Rally Mode! ***
Integra LifeSciences Holdings (NASDAQ:IART) develops, manufactures
and markets medical devices, implants and biomaterials primarily
used in the treatment of cranial and spinal disorders, soft tissue
repair and orthopedics. Integra is a leader in applying the
principles of biotechnology to medical devices that improve
patients' quality of life. In early August, Integra reported
record revenues and net income for the 2nd quarter, due primarily
to strong growth in product sales. Earnings for the quarter were
$0.10 per share, and revenue grew by 35% to $21.4 million. A
recent public offering raised over $113 million which allowed
the company to repay in full $7.9 million of bank loans and
terminate its $4.0 million revolving credit facility with Fleet
Capital Corporation. Technically, the stock is in a strong
Stage II rally that is showing no signs of weakening. Watch
for a violation of the 30-dma (near $27.00) to signal a possible
change in the primary trend.
SEP 30.00 UJI IF LB=2.80 OI=106 CB=28.50 DE=28 TY=5.7%
*****
PRIA - PRI Automation $17.89 **** More Bottom Fishing! ***
PRI Automation (NASDAQ:PRIA) is a global supplier of advanced
factory automation systems, software, and services that optimize
the productivity of semiconductor and precision electronics
manufacturers as well as OEM process tool manufacturers. PRI is
the only company to provide a tightly integrated and flexible
hardware and software solution that optimizes the flow of products,
data, materials and resources throughout the production chain.
No news since July when PRIA reported earnings with net revenues
of $75.2 million, down 15.4% for the 3rd quarter. The company
continues to restructure and reduce costs and it has improved its
cash position by $20 million from last quarter. PRIA continues to
forge a Stage I base and this position offers a reasonable cost
basis near technical support for those wishing to speculate on the
company's future.
SEP 17.50 UXQ IW LB=1.55 OI=204 CB=16.34 DE=28 TY=7.7%
*****
VICL - Vical $12.96 *** New Drug Speculation ***
Vical (NASDAQ:VICL), The Naked DNA Company(TM), is focused on
the development of pharmaceutical product candidates based on
its patented gene delivery technology. A number of therapeutic
and vaccine product candidates are currently under development
for the prevention or treatment of cancer, infectious diseases
and metabolic disorders by Vical and its collaborative partners.
Allovectin-7«, which uses a lipid-DNA complex to help the immune
system recognize and attack cancer cells, is in Phase II and
Phase III testing in certain patients with metastatic melanoma
and in Phase II testing in patients with head and neck cancer.
Leuvectin(TM), which uses a lipid-DNA complex to stimulate an
immune response against cancer cells, is in Phase II testing in
patients with prostate cancer. Vaxid, a naked DNA vaccine to
prevent relapse of B-cell lymphoma, is in Phase I/II testing.
Vical received some air-time last Saturday when the television
show, "Healthy Solutions" did an overview of Allovectin-7«. We
simply favor the recent bullish momentum in the stock which
allows for a reasonable entry point from which to speculate on
the company's future.
SEP 12.50 VAQ IV LB=1.05 OI=15 CB=11.91 DE=28 TY=5.4%
*****
WBSN - Websense $19.19 *** They Are Watching You! ***
Websense (NASDAQ:WBSN) is the worldwide leader of employee
Internet management (EIM) solutions. Websense Enterprise
software enables businesses to manage how their employees use
the Internet. This supports an organization's efforts to
improve employee productivity, conserve network bandwidth and
storage costs and mitigate legal liability. Websense is listed
on the year 2000 Software 500 ranking and has been honored by
the Deloitte & Touche "Technology Fast 50" program. Websense
rallied off the July low after the company announced continued
strong financial results for the quarter ended June 30, 2001,
achieving $8.2 million in revenue, generating $5.1 million in
positive cash flow and attaining profitability on a pro forma
basis one quarter ahead of schedule. The stock appears to be
forming a Head-n-Shoulders bottom with strong support near $16.
A move above the June high on heavy volume would confirm the
new bullish trend.
SEP 17.50 DQH IW LB=2.35 OI=5 CB=16.84 DE=28 TY=4.3%
*****
*****************
SUPPLEMENTAL COVERED CALL CANDIDATES
*****************
The following group of issues is a list of additional candidates
to supplement your search for profitable trading positions. As
with any investment, you must decide if the selections meet your
criteria for potential plays. Only you can know what strategies
and positions are suitable for your experience level, risk-reward
tolerance and portfolio outlook. They will not be included in
the weekly portfolio summary.
Sequenced by Target Yield (monthly basis)
*****
Stock Last Call Strike Option Last Open Cost Days Target
Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield
AMCC 15.03 SEP 15.00 AEX IC 1.35 2880 13.68 28 10.5%
MEDX 20.39 SEP 20.00 MZU ID 1.80 443 18.59 28 8.2%
SCTC 12.67 SEP 12.50 YQS IV 1.00 48 11.67 28 7.7%
CBST 41.67 SEP 40.00 UTU IH 3.40 1073 38.27 28 4.9%
FNSR 11.73 SEP 10.00 FQY IB 2.15 1318 9.58 28 4.8%
AVGN 14.93 SEP 12.50 GKU IV 2.90 28 12.03 28 4.2%
GLW 15.68 SEP 15.00 GLW IC 1.20 7475 14.48 28 3.9%
*****************
NAKED PUT SECTION
*****************
Success Basics: Avoiding Information Overload
by Ray Cummins
Learning to trade profitably in the market is a great achievement
but in truth, it involves no secrets. If you study the methods
of the most well known financial experts, you will find a number
of common characteristics. The first attribute is a fundamental
knowledge of market economics and the basic concept of supply and
demand. The second important trait is the use of a specific plan
or trading methodology. Another worthwhile quality is patience,
and the discipline to execute the trading plan without regard to
emotion and other outside influences. The final trait centers on
the ability to view the investment world in counterintuitive or
contrarian ways. This capacity involves the need to be creative
and oppose the current of popular opinion. In many ways, that is
the essence of any successful position management strategy.
One of the first concepts that novice traders must learn is to
separate the company from its stock. Companies change relatively
little on a fundamental basis in the short term, but their share
values move substantially. The primary point to remember is that
today's market price is not the company's value. Price is simply
a reflection of the current state of the public's attitudes about
a specific company. It is common knowledge that perceptions and
expectations are often completely out of line with absolute
valuations. Understanding the differences between value and the
current market price is one of the initial steps to becoming an
independent thinker.
Another difficult influence to overcome is the vast amount of
information that we are faced with in today's technologically
advanced society. Investors have access to a wide selection of
inexpensive market data; economic news, company announcements,
real-time quotes and professional quality charting services.
With the current revolution in communications, it is possible for
a trader to receive this information at almost any location on
the planet, with little or no delay. Financial news services
featuring every conceivable expert and their opinions on the
latest developments are also available around the clock. While
the value of such immediate (and hardly intellectual) analysis
is suspect, they continue to flood the airwaves with perpetual
appraisals of every event. To maintain an appearance of wisdom,
market "gurus" try to justify each individual price movement with
logical reasoning. Unfortunately, these experts can be motivated
by self-promotion and ego enhancement and thus the analysis often
exceeds common rationale. In addition, the media is constantly
searching for stories or angles that will increase their exposure
and improve advertising ratings. This leads to a sophisticated
and widely disseminated form of gossip that is not particularly
helpful from an informational point of view.
In simple terms, the investing public has extremely easy access
to news and analyses that tend to arouse emotions and overcome
one's intellect. Regrettably, this appetite for real-time data
and market information becomes a kind of addiction on which our
emotional subconscious thrives. As with any dependency, it takes
a greater amount of participation to maintain the same level of
excitement. The overdose may be in the form of new services or
software and often, more expensive equipment. Regardless of the
path to "information overload," the end result is generally the
same; a tendency to indulge in excess trading with a minimum of
actual research and planning. The outcome is similar to a drug
addict's withdrawal symptoms but in this case, poor decisions
simply lead to financial ruin as the market brutally assaults
every hastily conceived position that you have initiated.
The best way to avoid the effects of outside influences is to
deliberately structure your trade selection process so that the
critical decisions are made only when the markets are closed.
The key is to set aside time for examination and analysis when
external events will have less influence on your judgment. You
should also use proven strategies and sound money management
techniques to avoid situations that can be affected by external
elements. A popular theory suggests that the average investor
may very well try to be rational but his rationality tends to be
hampered by emotional works and social influences. That's not
something that you want working against you when it is time to
make an important trading decision.
Good Luck!
*** WARNING!!! ***
Occasionally a company will experience catastrophic news causing
a severe drop in the stock price. This may cause a devastatingly
large loss which may wipe out all of your smaller gains. There is
one very important rule; Don't sell naked puts on stocks that you
don't want to own! It is also important that you consider using
trading STOPS on naked option positions to help limit losses when
the stock price drops. Many professional traders suggest closing
the position when the stock price falls below the sold strike or
using a buy-to-close STOP at a price that is no more than twice
the original premium from the sold option.
SUMMARY OF PREVIOUS CANDIDATES
*****
Stock Price Last Call Strike Price Gain Potential
Symbol Picked Price Month Sold Picked /Loss Mon. Yield
PPD 20.50 21.41 SEP 15.00 0.80 *$ 0.80 11.8%
MDCC 20.50 22.34 SEP 17.50 0.95 *$ 0.95 11.2%
GERN 14.50 17.40 SEP 12.50 0.55 *$ 0.55 11.0%
CENT 8.98 9.34 SEP 7.50 0.35 *$ 0.35 10.3%
ALLY 18.23 18.30 SEP 15.00 0.50 *$ 0.50 9.5% Adj 2-1 split
AFCI 25.75 27.90 SEP 22.50 0.90 *$ 0.90 8.2%
PPD 21.09 21.41 SEP 15.00 0.40 *$ 0.40 7.5%
ISIL 39.20 41.35 SEP 30.00 0.90 *$ 0.90 7.5%
SAGI 17.75 18.50 SEP 15.00 0.40 *$ 0.40 7.3%
NEM 21.48 21.70 SEP 20.00 0.55 *$ 0.55 6.2%
APCS 18.52 16.69 SEP 15.00 0.30 *$ 0.30 6.2%
PRGX 13.75 15.09 SEP 12.50 0.30 *$ 0.30 5.7%
IMCL 44.89 51.39 SEP 30.00 0.70 *$ 0.70 5.2%
*$ = Stock price is above the sold striking price.
Comments:
Stocks rallied Friday in a rare and unexpected demonstration
of bullish activity after Cisco Systems (NASDAQ:CSCO) said
that its business outlook may be starting to stabilize. The
buying spree spurred the most powerful technology rally since
mid-July and a 200-point gain in the Dow Industrials. The
broader market was also strong with analysts pointing to the
favorable cumulative advance-decline line, which remains in
an extended up-trend from November, 2000. The issues in our
portfolio benefited from the renewed optimism and all of the
current positions are positive. Even the recently closed play
in Powerwave (NASDAQ:PWAV) has now recovered (Murphy's Law!)
and there is only one stock on the watch-list. That issue
is Alamosa Holdings (NASDAQ:APCS) and although we achieved a
favorable cost basis in the stock, the bearish activity has
threatened a key support area near $16. A move through that
range should be seen as a potential exit signal and we will
monitor the issue closely in the coming sessions.
Positions Closed:
Powerwave (NASDAQ:PWAV)
NEW CANDIDATES
*********
Sequenced by Company
*****
Stock Last Call Strike Option Last Open Cost Days Target
Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield
AFCI 27.90 SEP 25.00 AQF UE 0.70 1329 24.30 28 8.5%
GERN 17.40 SEP 15.00 GQD UC 0.45 286 14.55 28 9.8%
ILXO 29.15 SEP 25.00 IUE UE 0.45 0 24.55 28 6.1%
LBRT 15.35 SEP 12.50 IEY UV 0.25 164 12.25 28 7.7%
PLXS 36.19 SEP 30.00 QUA UF 0.80 48 29.20 28 9.6%
URBN 15.04 SEP 12.50 URQ UV 0.25 130 12.25 28 7.3%
VPHM 35.59 SEP 30.00 HPU UF 0.95 105 29.05 28 10.8%
Sequenced by Target Yield (monthly basis)
******
Stock Last Call Strike Option Last Open Cost Days Target
Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield
VPHM 35.59 SEP 30.00 HPU UF 0.95 105 29.05 28 10.8%
GERN 17.40 SEP 15.00 GQD UC 0.45 286 14.55 28 9.8%
PLXS 36.19 SEP 30.00 QUA UF 0.80 48 29.20 28 9.6%
AFCI 27.90 SEP 25.00 AQF UE 0.70 1329 24.30 28 8.5%
LBRT 15.35 SEP 12.50 IEY UV 0.25 164 12.25 28 7.7%
URBN 15.04 SEP 12.50 URQ UV 0.25 130 12.25 28 7.3%
ILXO 29.15 SEP 25.00 IUE UE 0.45 0 24.55 28 6.1%
Company Descriptions
LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even
point, DE-Days to Expiry, TY-Target Yield (monthly basis).
*****
AFCI - Advanced Fibre Communications $27.90 *** Entry Point! ***
Advanced Fibre Communications (NASDAQ:AFCI) develops, manufactures
and supports telecommunications access products and services that
enable telecommunications companies and other service providers to
connect their central office switches to end users for voice and
high-speed data communications. The company's products include
integrated multi-service access platforms, integrated access
devices, network management systems, indoor and environmentally
hardened outdoor cabinets for the portion of the telecommunications
network between the service provider and their customers, often
referred to as the "local loop," or "last mile." Advanced Fibre's
stock rallied in July after the telecommunications systems maker
reported strong second-quarter results and made positive comments
about the future. Analysts at Lehman Brothers, U.S. Bancorp Piper
Jaffray, WR Hambrecht, J.P. Morgan H&Q and Pacific Growth Equities
increased future earnings estimates and several brokerages raised
their price targets for AFCI's share value, based on the bullish
outlook. We simply favor the opportunity to own the issue at a
discounted cost basis.
SEP 25.00 AQF UE LB=0.70 OI=1329 CB=24.30 DE=28 TY=8.5%
*****
GERN - Geron $17.40 *** Stem Cell Research! ***
Geron (NASDAQ:GERN) is a biopharmaceutical company focused on
discovering, developing and commercializing therapeutic and
diagnostic products for applications in oncology and regenerative
medicine, and research tools for drug discovery. Geron's product
development programs are based upon patented core technologies:
telomerase, human embryonic stem cells and nuclear transfer.
Stem cell research has been in the news lately and Geron is one
of the companies involved in the reports. Geron financed much of
the work of University of Wisconsin researcher James Thomson, who
first isolated human embryonic stem cells, which many scientists
believe can be used to cure Alzheimer's and Parkinson's disease,
spinal cord injuries and other disorders. Geron has licensing
rights to six types of cells that can be made from those original
lines but there is a dispute over whether the company can add
cell types to its license agreement. Geron's rights to six cell
types is also important because President Bush has said federal
funding will be permitted for research only on cell lines that
are already in existence. Shares of the biotechnology company
rallied last week amid optimism rivals will have to pay it a fee
to develop certain cell types that could be used to treat a range
of diseases. Research this one carefully before initiating any
new positions!
SEP 15.00 GQD UC LB=0.45 OI=286 CB=14.55 DE=28 TY=9.8%
*****
ILXO - ILEX Oncology $29.15 *** On The Move! ***
ILEX Oncology (NASDAQ:ILXO) is building an oncology-focused
pharmaceutical company by assembling and developing a portfolio
of novel treatments both for advanced-stage cancers and for early
stage cancers and pre-malignant conditions. The company has a
portfolio of eight anticancer product candidates in clinical
development and several preclinical stage product candidates.
In addition to its clinical development programs, ILEX is also
conducting drug discovery research, translational research and
pre-clinical studies in the fields of angiogenesis inhibition
and targeted medicinal phosphonate chemistry, laying the initial
groundwork for bringing other new proprietary product candidates
into its pipeline. The company's leading product is Campath,
which the U.S. FDA has cleared for marketing as a treatment for
specific patients with B-cell chronic lymphocytic leukemia. The
issue is performing well in a bearish market and traders who want
to speculate on a biotechnology company should consider this
position.
SEP 25.00 IUE UE LB=0.45 OI=0 CB=24.55 DE=28 TY=6.1%
*****
LBRT - Liberate $15.35 *** AT&T Deal! ***
Liberate Technologies (NASDAQ:LBRT) is a global provider of a
comprehensive software platform for delivering content, services
and applications to a broad range of information appliances.
Information appliances, which include television set-top boxes,
game consoles and personal digital assistants, are devices that
are enhanced by Internet capability. Network operators, such as
telecommunications companies, cable and satellite television
operators and Internet service providers, can use the company's
server software to deliver Internet-enhanced services to numerous
information appliances and millions of consumers. Information
appliance manufacturers can use its client software to enable
their products for Internet use. Liberate has signed an agreement
to develop an interactive television delivery system with an AT&T
cable subsidiary and investors believe it will be the key to their
success in the near-term. The deal opens the door for Liberate to
power as many as 6 million digital set-top boxes already in the
market, including AT&T's 3 million digital cable subscribers, and
it also marks an opportunity in a highly competitive market that
is expected to rebound up after years of dismal consumer interest.
SEP 12.50 IEY UV LB=0.25 OI=164 CB=12.25 DE=28 TY=7.7%
*****
PLXS - Plexus $36.19 *** Positive Outlook! ***
Plexus (NASDAQ:PLXS) provides product realization services to
original equipment manufacturers in networking, data and tele-
communications, medical, industrial, computer and transportation
industries. The company provides advanced electronics design,
manufacturing and testing services to its customers and focus on
complex, high-end products. Plexus offers customers the ability
to outsource all stages of product realization, including design
and development, materials procurement and management, prototyping
and product introduction, testing, manufacturing and after-market
support. Plexus has performed better than most stocks in the
Contract Manufacturing sector (since mid-June) and Friday's rally
came after positive comments from Cisco Systems' chief executive,
who suggested that equipment demand is in fact "leveling out" and
should improve in the coming quarters. Traders who agree with a
favorable outlook for the industry can establish an acceptable
cost basis in PLXS with this position.
SEP 30.00 QUA UF LB=0.80 OI=48 CB=29.20 DE=28 TY=9.6%
*****
URBN - Urban Outfitters $15.04 *** Outstanding Earnings! ***
Urban Outfitters (NASDAQ:URBN) operates two business segments, a
lifestyle-oriented general merchandise-retailing segment and a
wholesale apparel business. The retailing segment consists of
retail stores and direct response, including a catalog and two
web-sites. The two retail concepts are Urban Outfitters (Urban
Retail) and Anthropologie, each of which sells a broad array of
fashion apparel, accessories and home and gift merchandise. The
company's wholesale business designs and markets young women's
casual wear that it provides to their retail operations and also
sells to approximately 1,300 better specialty retailers worldwide.
In mid-August, retailer Urban Outfitters posted an 82% rise in
quarterly income, topping analysts' estimates amid strong sales
in women's apparel and accessories. The incredible results sent
URBN's shares into "rally mode" and this position offers a low
risk method to profit from the recent bullish activity.
SEP 12.50 URQ UV LB=0.25 OI=130 CB=12.25 DE=28 TY=7.3%
*****
VPHM - ViroPharma $35.59 *** A Cure For The Common Cold? ***
ViroPharma (NASDAQ:VPHM) is a pharmaceutical company dedicated to
the commercialization, development and discovery of new antiviral
medicines. The company has focused its current product development
and discovery activities on a number of ribonucleic acid, or RNA,
virus diseases. These include viral respiratory infection (VRI),
often referred to as the common cold; hepatitis C; and respiratory
syncytial virus disease, or RSV disease. The company currently is
developing its most advanced product candidate, Picovir (pleconaril),
for the treatment of common diseases caused by picornaviruses. In
pre-clinical studies, Picovir has demonstrated an ability to inhibit
picornavirus replication in vitro by a novel, virus-specific mode of
action. VPHM's shares surged last week as news about a new drugs'
effectiveness in treating the common cold reached the public. The
report noted that a recent study showed that patients exhibited a
significantly reduced severity of cold symptoms within 12 to 24
hours after the first dose of Picovir, also known as Pleconaril,
and the drug shortened the duration of colds by a day and a half.
That's great news for all of us with runny noses and sore throats,
but it may not be so good for Campbell's (NYSE:CPB) Chicken Soup.
SEP 30.00 HPU UF LB=0.95 OI=105 CB=29.05 DE=28 TY=10.8%
*****
*****************
SUPPLEMENTAL NAKED PUT CANDIDATES
*****************
The following group of issues is a list of additional candidates
to supplement your search for profitable trading positions. As
with any investment, you must decide if the selections meet your
criteria for potential plays. Only you can know what strategies
and positions are suitable for your experience level, risk-reward
tolerance and portfolio outlook. They will not be included in
the weekly portfolio summary.
Sequenced by Target Yield (monthly basis)
******
Stock Last Call Strike Option Last Open Cost Days Target
Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield
ELNT 39.90 SEP 35.00 UET UG 1.35 24 33.65 28 11.8%
ISIL 41.35 SEP 35.00 UFH UG 0.95 317 34.05 28 9.3%
MERX 26.12 SEP 22.50 KXQ UX 0.60 57 21.90 28 8.8%
RCOT 18.75 SEP 17.50 ROQ UW 0.50 0 17.00 28 8.0%
XLNX 40.13 SEP 35.00 XLQ UG 0.85 3131 34.15 28 7.8%
SWS 20.91 SEP 20.00 SWS UD 0.50 30 19.50 28 6.8%
SEE DISCLAIMER IN SECTION ONE
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SPREADS/STRADDLES/COMBOS
************************
A Great Way To End The Week!
By Ray Cummins
******************************************************************
- MARKET RECAP -
******************************************************************
Friday, August 24
Investors moved back into stocks today after an optimistic report
from Cisco Systems (NASDAQ:CSCO), which suggested that "business
may be stabilizing" in the networking industry. The technology
composite jumped 73 points to 1,916 with solid gains in computer
hardware, software and semiconductor issues. The Dow industrial
average rose almost 200 points to 10,423 amid strength in hi-tech
bellwethers Microsoft (NASDAQ:MSFT), Hewlett-Packard (NYSE:HWP),
Intel (NASDAQ:INTC) and International Business Machines (NYSE:IBM).
The broader market S&P 500 index ended up 22 points at 1,184 with
buying pressure seen in biotechnology, brokerage, retail, chemical
and cyclical issues. Trading volume on the Big Board reached 1.04
billion shares with advances beating declines 19 to 11. Activity
on the NASDAQ was a light 1.48 billion shares, with winners pacing
losers 22 to 13. In the U.S. bond market, the 30-year Treasury
fell 19/32, pushing its yield up to 5.45%.
Last Week's new plays (positions/opening prices/strategy):
Amerisource (NYSE:AAS) SEP50P/55P $0.60 credit bull-put
Elec. Data (NYSE:EDS) SEP70C/65C $0.70 credit bear-call
First Bank (NSDQ:FITB) SEP55P/60P $0.65 credit bull-put
Freddie Mac (NYSE:FRE) SEP60P/65P $0.65 credit bull-put
Serena (NSDQ:SRNA) SEP12C/12P $3.00 debit straddle
All of the new positions offered favorable entry opportunities
during the week. Unfortunately, the Reader's Request play in
FRE turned south after the Federal Reserve cut interest rates
by only one-quarter point and gave investors little hope the
sluggish economy is rebounding. The abrupt change in character
was a clear indication to exit (or adjust) the position and we
took the easy way out, closing the bullish spread for an $0.80
debit. FITB also became suspect after falling below a recent
support area on Thursday. A move through the 50-dma near $62
is an indication of potential "failed" rally and a close below
the June-July lows would be the proverbial "nail in the coffin."
Portfolio Activity:
The market took an unexpected plunge on Tuesday after the Federal
Reserve reduced interest rates by only 25 basis points and issued
downbeat remarks about the state of the U.S. economy. The major
averages had been trading cautiously higher ahead of the decision
but reports that business profits and capitol spending continue to
weaken while growth abroad is slowing left investors unsure about
the near-term future of the stock market. Analysts also noted
that there had been increasing talk recently of a 50 basis-point
cut and the news was disappointing to traders who expected a more
upbeat assessment of the economy. In addition, renewed concerns
that the easing cycle may be coming to an end weighed heavily on
interest-rate-sensitive issues and our recent bullish spread in
Fannie Mae (NYSE:FNM) required timely action as the issue quickly
reversed direction after the announcement. The closing debit was
only $0.75; a $0.15 loss in the position. In the Straddles group,
traders who took the early profit in the bearish portion of the
Amdocs (NYSE:DOX) play now have a free $40-Call to exploit until
the September options expiration. In other portfolio news, two
of last month's positions enjoyed bullish activity with both plays
achieving positive results. Isis Pharmaceuticals (NASDAQ:ISIP),
a recent synthetic position, was a surprise winner following its
announcement of a strategic alliance with Eli Lilly (NYSE:LLY).
The stock jumped 50% to a high near $15 after Lilly committed more
than $200 million in funding to Isis over a four-year period. The
drug giant will make a $75 million investment in Isis through the
purchase of stock, issue a $100 million loan and pay $25 million
in up-front licensing fees. The rally provided a great closing
credit for traders who had the patience to remain in the bullish
play. Another portfolio position that slumped during expiration
week was Medtronic (NYSE:MDT) and although we decided to exit the
bullish credit-spread for a small loss, a number of readers rolled
to the Sep-$40 Put for a small premium. The move appears to be a
good decision as the issue recovered early in the week and is now
trading above $45.
******************************************************************
- NEW PLAYS -
******************************************************************
FLR - Fluor $43.32 *** Hot Sector! ***
Fluor (NYSE:FLR) is a holding company that provides services on
a worldwide basis in the fields of engineering, procurement,
construction, maintenance, operations, project management and
business services. These services are grouped into three major
operating segments. Fluor Daniel provides a range of design,
engineering, procurement, construction and other services to
clients in a broad range of industrial and geographic markets on
a worldwide basis. Fluor Global Services include equipment sales,
temporary technical and non-technical staffing, services to the
United States government, and productivity consulting services
and maintenance management, among others. Signature Services
provides integrated business services and business infrastructure
support in the areas of human resources, finance, accounting,
safety, information technology, knowledge management and office
support services.
Stocks in the Materials and Construction group have performed
very well over the last few weeks and analysts say Fluor is
one of the leaders in the industry with a fundamentally sound
balance sheet and a favorable outlook for earnings growth. In
addition, the issue is demonstrating renewed technical strength
as it recovers from a recent consolidation and the outlook is
definitely bullish in the near-term. Traders who believe the
upside activity will continue can profit from that outcome with
this conservative position.
PLAY (conservative - bullish/credit spread):
BUY PUT SEP-35 FLR-UG OI=592 A=$0.35
SELL PUT SEP-40 FLR-UH OI=200 B=$0.95
INITIAL NET CREDIT TARGET=$0.65-$0.75 PROFIT(max)=14%
******************************************************************
SHPGY - Shire Pharma $46.05 *** An Old Favorite! ***
Shire Pharmaceuticals Group PLC (NASDAQ:SHPGY) is a worldwide
specialty pharmaceutical company with a strategic focus on four
therapeutic areas: central nervous system disorders, metabolic
diseases, oncology and gastroenterology. The company operates
and manages its business in the United States, Europe and the
rest of the world. Within these geographical segments, revenues
are derived from sales of products by the company's own sales
and marketing operations, licensing and development fees and
royalties. Shire Pharmaceuticals has its own direct marketing
capability in the United States, Canada, the United Kingdom, the
Republic of Ireland, France, Germany, Italy and Spain. Shire
also covers other pharmaceutical markets indirectly through
distributors.
Shire is an old favorite in the Spreads/Straddles section and we
follow the issue on a regular basis for potential portfolio plays.
Unfortunately, the stock has not been performing very well over
the past few weeks and there is little indication that the trend
will change in the near future. The technical outlook is bearish
and traders who agree with that view can speculate on the movement
of SHPGY with this conservative position.
PLAY (conservative - bearish/credit spread):
BUY CALL SEP-55 UGH-IK OI=98 A=$0.25
SELL CALL SEP-50 UGH-IJ OI=1853 B=$0.85
INITIAL NET CREDIT TARGET=$0.70-$0.75 PROFIT(max)=15%
******************************************************************
SRCL - Stericycle $45.62 *** Trading Range? ***
Stericycle (NASDAQ:SRCL) is a regulated medical waste management
company in North America, serving approximately 250,000 customers
throughout the United States, Canada, Puerto Rico and Mexico.
The company's network includes 33 treatment/collection centers
and 99 additional transfer and collection sites. The company
uses this network to provide a broad service offering, including
medical waste collection, transportation, treatment and related
consulting, training and education services and products.
This position is based on the current price or trading range of
the underlying issue and its recent technical history or trend.
Stericycle appears to be forming a Stage III top as it is finding
formidable resistance at $50. The decline below the July low is
ominous and suggests a test of the 150-dma (near $43) will occur
in the near future. The 50-dma (near $47) now becomes the first
level of resistance, giving little chance of a move towards $50
and considering the heavy overhead supply at our sold strike,
this position offers reasonable risk with an acceptable reward.
PLAY (conservative - bearish/credit spread):
BUY CALL SEP-55 URL-IJ OI=190 A=$0.45
SELL CALL SEP-50 URL-IK OI=73 B=$1.00
INITIAL NET CREDIT TARGET=$0.60-$0.70 PROFIT(max)=14%
******************************************************************
SWS - Southwest Securities $20.91 *** On The Rebound! ***
Southwest Securities (NYSE:SWS) is a full-service securities and
banking firm using technology to deliver a broad range of unique
investment and related financial services to its clients, which
include individual and institutional investors, broker/dealers,
corporations, governmental entities and financial intermediaries.
The company's Brokerage Group provides clearing services to 200
correspondent broker/dealers and over 500 independent contract
brokers, as well as full-service and online discount brokerage
services to individual investors. Its Asset Management Group
offers investment management, advisory and trust services through
three subsidiaries. Under the Banking Group, the company also
offers full-service, traditional banking through First Savings
Bank.
We found this position while scanning for potential Covered-Call
candidates and based on the recent activity, the issue appears
poised for future gains. At the same time, the premium in the
near-term calls is relatively low so we will attempt to profit
from additional upside activity with a synthetic (long) position.
This strategy is appropriate for a trader who is bullish on the
underlying issue and has adequate portfolio collateral to cover
the margin requirement of the sold (short) put. We will target
a small credit (overall) in the play initially, to allow for a
brief consolidation in the share value of SWS.
PLAY (conservative - bullish/synthetic position):
BUY CALL OCT-22.50 SWS-JX OI=6 A=$1.00
SELL PUT OCT-20.00 SWS-VD OI=0 B=$0.90
INITIAL NET TARGET=$0.10-$0.20 TARGET PROFIT=$0.60-$0.75
Note: Using options, the position is similar to being long the
stock. The collateral requirement for the sold (short) put is
approximately $845 per contract.
******************************************************************
- STRADDLES AND STRANGLES -
******************************************************************
TER - Teradyne $35.05 *** Big Mover! ***
Teradyne (NYSE:TER) is a manufacturer of automatic test equipment
and related software for the electronics and communications
industries. Their products include systems to test and inspect
semiconductors, circuit boards,; high-speed voice communication,
analog and digital data and software. Teradyne is also a global
manufacturer of back-planes and associated connectors used in
electronic systems.
One of our readers asked for some speculative straddles in the
technology group and despite Friday's market volatility, there
are a number of great candidates for neutral, option-buying
strategies. Here is one possible play, based on analysis of
historical option pricing and technical background. Recent news
and market sentiment will have an effect on the issue so review
the position thoroughly and make your own decision about its
future outcome. Target a slightly lower (overall) debit in the
play initially, to allow for some consolidation in the option
premiums after the recent volatility.
PLAY (speculative - neutral/debit straddle):
BUY CALL SEP-35 TER-IG OI=111 A=$2.15
BUY PUT SEP-35 TER-UG OI=78 A=$2.10
INITIAL NET DEBIT TARGET=$4.00 TARGET PROFIT=15-25%
******************************************************************
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